Tips are taxable income in California, and you owe both income tax and self-employment tax on them

California treats tips the same way the federal government does: as wages. You must report all tips — cash and card — to your employer and on your tax return. The state taxes tips at your regular income tax rate, which ranges from 1% to 13.3% depending on what you earn. You also owe self-employment tax (Social Security and Medicare) on tips, even if your employer does not withhold it from your paycheck.

This applies whether you work in a restaurant, salon, rideshare, delivery, or any other tipped job. The amount does not matter — a single dollar in tips is taxable income. Many workers underreport or do not report tips at all, but the IRS and California Franchise Tax Board both track tip income through credit card processors and employer reports.

Key Takeaways

  • All tips, whether cash or card, must be reported to your employer and included on your tax return as income.
  • California taxes tips at your marginal income tax rate, which can be as high as 13.3% for high earners, plus federal income tax.
  • You owe self-employment tax on tips even if your employer does not withhold it, adding roughly 15.3% in Social Security and Medicare taxes.
  • If you do not report tips to your employer, you must still report them on your tax return to avoid penalties and interest.
  • Employers must report all tips they know about on your W-2 form, and credit card companies report card tips to the IRS automatically.

How California income tax applies to tips

California has a progressive income tax system. Your tips are added to your wages and taxed at the same rate as the rest of your income. If you earn $30,000 a year in wages plus $5,000 in tips, California taxes that $35,000 total, not just the wages.

The state tax rate depends on your total income. At $35,000, you would pay roughly 4% to 5% in state income tax. At $100,000, the rate climbs to around 9%. At $500,000 or more, it reaches 13.3%. This is separate from federal income tax, which also applies to tips.

If you work for an employer, they may withhold California income tax from your paycheck. If they do not withhold enough to cover your tips, you will owe the difference when you file your return. If you are self-employed or work as an independent contractor (like a rideshare driver), you are responsible for setting aside money for taxes yourself.

Self-employment tax on tips

Self-employment tax funds Social Security and Medicare. The combined rate is 15.3% — 12.4% for Social Security and 2.9% for Medicare. You pay this on net self-employment income, which includes tips.

If you are an employee (W-2 worker), your employer pays half of the Social Security and Medicare tax, and you pay the other half through payroll withholding. Tips complicate this because your employer may not know about cash tips. If you receive cash tips, you are responsible for reporting them to your employer so the correct amount is withheld. If you do not report them, you still owe the tax when you file your return.

If you are self-employed or a gig worker (1099 contractor), you pay the full 15.3% self-employment tax on all tips. This is in addition to income tax.

Reporting tips to your employer

California law requires you to report tips to your employer. For card tips, the credit card processor reports them automatically, so your employer already knows. For cash tips, you should report them to your manager or payroll department, usually daily or at the end of your shift.

Your employer uses this information to calculate payroll withholding and to report your income on your W-2 form at the end of the year. If you do not report cash tips, your employer cannot withhold the correct amount of tax, and you will owe it all at tax time.

Some employers ask employees to sign tip reporting forms or use apps to log tips. Others use a percentage of sales as an estimate. Whatever method your employer uses, the tips are still your income and still taxable.

What happens if you do not report tips

Not reporting tips is tax evasion. The IRS and California Franchise Tax Board both pursue it. Credit card companies automatically report card tips to the IRS, so those are tracked. Cash tips are harder to detect, but the IRS uses statistical methods to estimate unreported tips based on your industry and employer.

If you underreport income, you face penalties and interest. The penalty for negligence is 20% of the unpaid tax. If the IRS determines you intentionally evaded taxes, the penalty can be 75%. Interest accrues from the date the tax was due, compounding daily. A $5,000 underreported tip income from 2022 could cost you $2,000 or more by the time you file in 2024.

The safest approach is to report all tips, whether cash or card. If you are unsure how to report them, ask your employer or a tax professional.

Tips and minimum wage in California

California minimum wage is currently $16 per hour statewide (as of 2024, though this may change). Employers must pay this wage regardless of tips. Tips do not count toward minimum wage — they are extra income on top of your hourly pay.

This is different from some other states where employers can pay a lower "tipped minimum wage" and tips are supposed to make up the difference. In California, you get the full minimum wage plus tips, and all of it is taxable.

Deductions and credits that may reduce your tax bill

If you work in a tipped job, you may be able to deduct certain work-related expenses. If you are self-employed (a gig worker or independent contractor), you can deduct things like gas, vehicle maintenance, phone bills, and a portion of your home office if you use it for work. Keep receipts and track mileage.

If you are a W-2 employee, you cannot deduct work expenses on your California return, though you may be able to deduct them on your federal return if you itemize. California does not allow the federal miscellaneous deduction for employee expenses.

You may also be able to claim the Earned Income Tax Credit (EITC) if your income is low enough. Tips count as income for EITC purposes, so reporting them could actually lower your tax bill if you may have access to for the credit.

Frequently Asked Questions

Do I have to report cash tips if nobody saw me get them?

Yes. All income, including cash tips, is taxable whether or not anyone else knows about it. The IRS expects you to report it on your return. Not reporting it is tax evasion, even if your employer does not know about the tips.

What if my employer does not withhold taxes on my tips?

You are still responsible for paying the tax. If your employer does not withhold enough, you will owe the difference when you file your return. You can ask your employer to increase withholding, or you can make estimated tax payments throughout the year to avoid a large bill at tax time.

Are tips taxed differently if I work for a small business versus a large restaurant?

No. Tips are taxed the same way regardless of employer size. All tips are income, and all are subject to California income tax and self-employment tax. The only difference is how the employer reports them — large employers may use automated systems, while small businesses may track tips manually.

Do I owe taxes on tips if I am under 18?

Yes. Age does not change the tax rules. If you earn tips, you must report them and pay tax on them. You may owe less tax overall because your income is lower, but the tips are still taxable.

Can I deduct tips I give to other workers?

No. Tips you give to coworkers (like tipping out the kitchen or bartender) are not deductible. You already paid tax on the money when you earned it, and giving it away does not create a deduction.