Tips are taxed as income in Texas, both by the federal government and by your employer

Texas has no state income tax, which means the state itself does not tax your tips. However, the federal government does tax all tips you receive — whether you report them or not. Your employer is required to withhold federal income tax, Social Security tax, and Medicare tax from your reported tips, just as they do from your wages. If you do not report tips to your employer, you still owe federal tax on them when you file your tax return.

The key difference in Texas is that you will not see a state income tax line on your pay stub. You will still see federal withholding, Social Security, and Medicare deductions. The amount withheld depends on how much you report to your employer and what you claim on your W-4 form.

Key Takeaways

  • Texas does not tax tips as state income, but the federal government taxes all tips you receive as ordinary income.
  • You must report tips to your employer if they total $20 or more in a month, and your employer will withhold federal taxes from that amount.
  • If you receive tips in cash and do not report them, you still owe federal income tax on them when you file your return.
  • Social Security and Medicare taxes explore to tips just as they do to wages, at the same rates.

How much you must report to your employer

If your tips add up to $20 or more in a calendar month, you are required to report the total to your employer by the 10th day of the following month. This applies whether your tips are cash, credit card, or a combination. Your employer then uses this amount to calculate withholding for federal income tax, Social Security, and Medicare.

If your tips are less than $20 in a month, you do not have to report them to your employer, but you still owe federal tax on them. You would report these unreported tips on your tax return when you file.

Federal taxes withheld from tips

Your employer withholds three types of federal tax from reported tips: income tax, Social Security tax (6.2 percent), and Medicare tax (1.45 percent). The income tax withholding depends on what you claimed on your W-4 form and your total income for the year.

If your employer does not have enough wages to cover the withholding owed on your tips, they may ask you to pay the difference out of pocket. This can happen if you earn a low hourly wage but receive substantial tips. Some employers deduct the withholding from your next paycheck; others may require you to pay it directly.

Cash tips and unreported income

Cash tips are income whether you report them or not. If you receive cash tips and do not report them to your employer, you are still legally required to report them on your federal tax return. The IRS expects tip income to be reported, and underreporting tips can result in penalties and interest.

Many workers underreport or do not report cash tips, but the IRS has tools to identify patterns of underreporting. If your reported income seems inconsistent with your job (for example, a server reporting very low tips), the IRS may audit your return or your employer's records.

Credit card tips and automatic reporting

Credit card tips are reported to your employer automatically through the payment processor. Your employer receives a record of all credit card tips and includes them in your pay stub. These tips are already tracked and reported to the IRS through your employer's records, so there is no option to underreport them.

Because credit card tips are documented, they are the easiest for the IRS to verify. Your employer reports them on your W-2 form at the end of the year, and the IRS cross-checks this against your tax return.

Self-employment and tip income

If you are self-employed and receive tips (for example, as an independent contractor or gig worker), you must report all tips as self-employment income. You will owe both income tax and self-employment tax, which covers Social Security and Medicare at a combined rate of 15.3 percent. You pay this tax when you file your return or through quarterly estimated tax payments.

Self-employed workers do not have an employer to withhold taxes, so you are responsible for setting aside money throughout the year to cover what you will owe.

What to do if you disagree with your tip reporting

If you believe your employer has incorrectly reported your tips on your W-2, you can contact your employer's payroll department to request a correction. If the employer does not correct it, you can file Form 8949 with your tax return to report the discrepancy and claim the correct amount.

Keep your own records of tips you receive, especially cash tips. A straightforward log with the date, amount, and source (cash or card) protects you if there is ever a dispute about what you reported or what your employer reported to the IRS.

Frequently Asked Questions

Do I have to report tips under $20 a month?

You do not have to report tips under $20 in a month to your employer. However, you still owe federal income tax on them. Report them on your tax return when you file.

Can my employer take my tips to cover taxes owed?

Your employer can deduct federal tax withholding from your paycheck, including withholding on tips. They cannot take your tips themselves or use them to pay other debts. Tips belong to you; your employer only withholds taxes owed on them.

What happens if I do not report cash tips?

Unreported tips are still taxable income. If the IRS discovers unreported tips through an audit or through your employer's records, you will owe back taxes, plus penalties and interest. It is safer and simpler to report all tips.

Are tips subject to Social Security and Medicare tax?

Yes. Social Security tax of 6.2 percent and Medicare tax of 1.45 percent explore to all tips you report to your employer, just as they do to wages.

Do I need to report tips if I work in Texas?

Yes. Texas does not tax tips as state income, but federal tax still applies. You must report tips to your employer if they total $20 or more in a month, and you owe federal income tax on all tips.