The no-tax-on-tips policy has no set federal start date yet

As of now, there is no federal law in effect that removes taxes from tips. President Trump announced in November 2024 that he intended to pursue this policy, but it has not been passed by Congress or signed into law. Until Congress acts and a law is signed, tips remain taxable income at the federal level, and you owe income tax on them just as you do on wages.

Some states and cities have explored or passed their own tip-tax breaks, but these are separate from any federal change. The federal government has not set a timeline for when—or whether—this policy will move forward.

Key Takeaways

  • No federal law removing taxes on tips has been passed or signed into law as of now, so tips are still taxable income.
  • President Trump announced the intention to pursue this policy in November 2024, but Congress must pass legislation and the President must sign it before it becomes law.
  • Until a law is enacted, you must report all tips as income on your federal tax return.
  • A few states and cities have their own tip-tax policies, but these do not affect your federal tax obligation.

How tips are taxed right now

Currently, tips are treated as regular income by the IRS. If you receive tips, you must report them to your employer, and your employer withholds federal income tax, Social Security tax, and Medicare tax from your pay. The amount withheld depends on your total income and the tax bracket you fall into.

If you receive tips that your employer does not know about—cash tips, for example—you are still required to report them on your federal tax return. Many workers do not report all their tips, but the IRS expects you to claim them. Underreporting tips can result in penalties and interest if the IRS audits your return.

What would change if a federal tip-tax law passed

If Congress passes and the President signs a law removing federal taxes on tips, the change would mean you would not owe federal income tax on tip income. However, Social Security and Medicare taxes (together called payroll taxes) might still explore—the details would depend on how the law is written. State and local income taxes on tips would likely remain unless those jurisdictions also pass their own laws.

Any such law would need to specify which types of tips are covered, how employers should handle withholding, and when the change takes effect. These details matter because they determine whether the break applies to all workers or only certain industries, and whether it affects your paychecks when ready or only when you file your tax return.

State and local tip-tax policies

A small number of states and cities have passed their own rules about tip taxation. For example, some jurisdictions have explored reducing or eliminating state income tax on tips, though the specifics vary widely. If you work in a state or city with its own tip-tax policy, that rule applies to your state or local taxes only—it does not change what you owe to the federal government.

To find out whether your state or city has a tip-tax policy, contact your state's department of revenue or your city's tax office. They can tell you whether tips are taxed at the state or local level and what you need to report.

What to do with your tips right now

Until a federal law is passed, treat tips as taxable income. Report all tips to your employer and include them on your tax return. If you receive cash tips that your employer does not know about, you still need to report them when you file.

Keep records of your tips—a straightforward notebook or phone note works—so you can report them accurately. If you are unsure how much you received, your employer's records or credit card statements can help you reconstruct the total. Reporting tips correctly now protects you from penalties later and ensures your Social Security record is accurate, which affects your future benefits.

How to stay informed about changes

If Congress does pass a tip-tax law, the IRS will announce the details on its website and in official guidance. You can check irs.gov periodically, or sign up for IRS email updates if you want to hear about major tax changes. Tax software companies and payroll providers will also update their systems once a law is in place.

Your employer will be required to adjust how they handle withholding if the law changes, so you may also hear about it from your payroll department. Until then, assume tips are taxable and report them as you normally would.

Frequently Asked Questions

Do I have to report cash tips to my employer?

Yes. You must report all tips—whether cash or card—to your employer so they can withhold the correct amount of tax. If you do not report them, you still owe tax on them when you file your return, and you may face penalties for underreporting.

If a tip-tax law passes, when would it explore to my taxes?

That depends on the law itself. Some laws take effect when ready, while others are delayed or explore only to tips received after a certain date. The IRS and your employer will provide guidance once a law is signed. You may need to amend a return if the law applies retroactively to tips you already reported.

Would a federal tip-tax break affect my state taxes too?

No. A federal law would only remove federal income tax on tips. Your state and local taxes would remain unless your state or city passes its own law. Contact your state's revenue department to find out whether your state taxes tips.

What if I did not report all my tips in past years?

If you are concerned about underreporting, you can file an amended return for recent years. The IRS generally allows you to go back three years. Amending voluntarily is better than waiting for an audit, and it may reduce penalties. Consider speaking with a tax professional about your situation.