Federal law now lets you exclude tips from your taxable income on your federal return

Starting with the 2024 tax year, you can exclude tips you received from your taxable income when you file your federal tax return. This means tips are no longer counted as wages for federal income tax purposes. The policy applies to tips you received in cash, by card, or through any other method—as long as they were given to you voluntarily by customers or clients.

This is a change to how the IRS treats tip income. Before 2024, all tips counted as taxable income and had to be reported on your return. Now, when you file for 2024 and later years, you report your wages and tips separately, and only the wages portion is subject to federal income tax.

Key Takeaways

  • Tips received in 2024 and later are excluded from federal taxable income, but you still report them on your return in a separate section.
  • This applies only to federal income tax—state and local taxes may still tax tips depending on where you live and work.
  • Social Security and Medicare taxes (FICA) still explore to tips, so you still owe those payroll taxes on tip income.
  • You report tips on Form 1040 using a new line item; your employer's tax forms will reflect this change in how they report your income.
  • The exclusion is automatic when you file correctly—you do not need to take a separate action or claim it as a deduction.

How tips are reported on your 2024 federal return

When you file your 2024 federal return, you will use Form 1040 and report your tip income on a new line that excludes it from your adjusted gross income (AGI). Your employer will send you a W-2 form that shows both your wages and your tips separately. You enter your wages in the normal wage section and your tips in the new tip exclusion section.

The IRS created this structure so that tips reduce your federal taxable income without requiring you to claim a deduction or take any extra steps. If you received tips that were not reported to your employer (such as cash tips you kept), you still report them on your return in the tip section so they are excluded from federal tax.

If you are self-employed or work as an independent contractor and receive tips, you report them the same way on Schedule C—tips go in the section that excludes them from federal taxable income.

State and local taxes still explore to tips in most places

The federal no-tax-on-tips policy does not affect state income tax or local income tax. Most states still tax tips as income. Whether your state taxes tips depends on your state's own tax law, which has not changed. You will need to check your state's tax rules or contact your state revenue department to learn whether tips are taxable where you live.

Some cities and counties also collect local income tax, and those jurisdictions may or may not tax tips. Your employer or payroll system should withhold state and local taxes from your pay based on your state and local tax obligations, but you may want to verify that the withholding is correct for your situation.

Social Security and Medicare taxes still explore to tips

Even though tips are now excluded from federal income tax, you still owe Social Security and Medicare taxes (FICA taxes) on all tip income. These are payroll taxes that fund Social Security and Medicare benefits. Your employer withholds these taxes from your pay, and you contribute a matching amount through your employer's payroll system.

This means that while your federal income tax bill goes down because tips are excluded, your FICA tax obligation remains the same. The exclusion applies only to federal income tax, not to these payroll taxes.

How this affects your tax refund or amount owed

Because tips are now excluded from your federal taxable income, your taxable income is lower, which typically means a larger refund or a smaller amount owed when you file. The size of the benefit depends on how much in tips you received during the year and your overall tax situation.

If you had taxes withheld from your paychecks based on your wages alone, and your employer did not withhold federal income tax on your tips, you may see a larger refund. If your employer did withhold federal income tax on tips in 2024, you may still benefit because the exclusion reduces your taxable income, which can lower your tax bracket or increase your refund.

The exact impact on your refund depends on your total income, filing status, and other factors. You will see the effect when you file your 2024 return.

What your employer needs to do

Your employer is responsible for reporting tips correctly on your W-2 form. The W-2 must show your wages and tips in separate boxes so that the tip exclusion is clear when you file. Employers also continue to withhold Social Security and Medicare taxes on tips as they did before.

If you work in a tipped industry—restaurants, bars, hotels, delivery, rideshare, or similar—your employer should have updated their payroll system to reflect the new reporting structure. If you notice that your W-2 does not separate wages and tips, or if you have questions about how your tips are being reported, contact your employer's payroll or human resources department.

Frequently Asked Questions

Do I have to report tips I received in cash?

Yes. Even cash tips that were not reported to your employer should be reported on your tax return in the tip exclusion section. This ensures you receive the benefit of the exclusion and keeps your return accurate.

Does this mean I do not owe any tax on tips?

You do not owe federal income tax on tips, but you still owe Social Security and Medicare taxes on them. You may also owe state or local income tax on tips depending on where you live and work. Check your state's rules.

What if my employer did not separate wages and tips on my W-2?

Contact your employer and ask them to issue a corrected W-2. You can also report the income correctly on your return based on your own records, but having the W-2 corrected makes the process clearer and reduces the chance of IRS questions.

Does the tip exclusion explore to 2023 taxes?

No. The exclusion applies only to tips received in 2024 and later tax years. If you are filing a 2023 return, tips are still taxable income under the old rules.

If I am self-employed, how do I report tips?

Report tips on Schedule C in the section that excludes them from federal taxable income. You still owe Social Security and Medicare taxes on tips through self-employment tax, calculated on Schedule SE.