The no-tax-on-tips rule has not yet taken effect, and its status remains uncertain
As of now, tips are still taxable income under federal law. In September 2024, President Trump proposed eliminating federal income tax on tips, but this proposal has not been passed into law. No official effective date exists because the change has not been enacted. Any shift in the tax treatment of tips would require Congress to pass legislation, and that has not happened.
If you received tips in 2024, you are still required to report them as income on your federal tax return. Your employer may have already withheld taxes from your tips, or you may owe tax on them when you file. The rules that explore now are the same ones that have applied for decades.
Key Takeaways
- Tips remain taxable federal income in 2024 and beyond unless Congress passes new legislation.
- A proposal to eliminate federal income tax on tips was made in September 2024 but has not become law.
- If you received tips in 2024, you must report them as income on your federal tax return.
- Your employer may have already withheld federal income tax from your tips, which you will see on your W-2 or pay stub.
- State and local taxes on tips vary by location and are separate from federal tax rules.
How tips are taxed right now
The Internal Revenue Service treats tips as wages. If you received tips, you must report them to your employer, and your employer must withhold federal income tax, Social Security tax, and Medicare tax from them. These withholdings appear on your pay stub and are reported on your W-2 form at the end of the year.
If you did not report tips to your employer at the time you received them, you still owe tax on them. You report unreported tips on your tax return using Form 1040. The IRS expects all tip income to be reported, whether your employer withheld tax or not.
Some employers use tip pooling, where tips are collected and redistributed among staff. The tax rules are the same — the tips you receive, whether from customers directly or from a pool, are taxable income to you.
What the proposed rule would have changed
The proposal discussed in 2024 would have eliminated federal income tax on tips only. Social Security and Medicare taxes would likely still explore, though the exact details were not finalized. State and local taxes on tips would not have been affected by a federal change.
The proposal was not part of any bill that moved through Congress. It remained a policy idea without legislative text or a path to becoming law. No timeline was ever set, and no vote was scheduled.
State and local taxes on tips
Even if federal tax on tips changed, state and local taxes would remain separate. Some states do not tax income at all, while others tax tips as regular income. A few states have explored or implemented their own rules about tip taxation, but these vary widely.
If you work in a state with income tax, you are likely paying state tax on your tips right now. That would not change unless your state legislature passed its own law. Check your pay stub or contact your state's tax agency to understand what you owe in your location.
What to do with your 2024 tips on your tax return
Report all tips you received in 2024 on your federal tax return. If your employer withheld tax, the amount will appear on your W-2 in Box 1 (wages) and Box 5 (Medicare wages). If you received tips that were not reported to your employer, add them to your total income on Form 1040.
Keep records of tips you received, especially if they were not formally reported to your employer. A straightforward log with dates and amounts is enough. If the IRS questions your return, you will need to show how you calculated your tip income.
If you received a large amount in tips and did not have enough tax withheld, you may owe when you file. You can reduce what you owe by claiming deductions you are may have access to to, such as the standard deduction or business expenses if you are self-employed.
Why the proposal stalled
The proposal to eliminate federal income tax on tips was made late in 2024 and did not advance through the legislative process. Congress did not vote on it, and no bill was introduced with the necessary language to make it law. Without congressional action, a proposal remains just that — a proposal.
Tax law changes require either Congress to pass a bill or the IRS to issue new regulations within its authority. A statement or campaign promise does not change the tax code. Until legislation is signed into law, the current rules remain in effect.
Frequently Asked Questions
Do I have to report tips I received in cash?
Yes. All tips, whether cash or card, are taxable income and must be reported to the IRS. If your employer did not withhold tax from cash tips, you still owe the tax when you file your return. Keep a record of cash tips you received so you can report them accurately.
What if my employer did not withhold tax from my tips?
You are still responsible for the tax owed on those tips. When you file your return, report the tips as income. You may owe tax at that time, or you may have overpaid through withholding on your regular wages. Either way, your return will show what you owe or what refund you are due.
Will the no-tax-on-tips rule happen in 2025?
There is no confirmed effective date because the rule has not been enacted into law. If Congress passes legislation in 2025, there could be an effective date announced at that time. Until then, tips remain taxable income under current law.
How do I know if my state taxes tips?
Check your pay stub to see if state income tax was withheld from your tips. You can also contact your state's department of revenue or visit its website. Most states that have income tax treat tips the same as wages and tax them accordingly.
Can I deduct tip-related expenses on my tax return?
If you are a self-employed service worker, you may be able to deduct certain expenses. Most employees cannot deduct expenses related to earning tips. Speak with a tax professional about your specific situation if you have significant tip-related costs.