Tip income is taxable and must be reported

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FS-2022-37, October 2022

People who work in restaurants, salons, hotels and similar industries often receive tips for the customer service they provide. Tips can be taxable income, but it’s important for people working in these areas to understand important details involving tips.

What are tips? 

Tips are optional cash or noncash payments that customers make to employees.

• Cash tips include: those received directly from customers, electronically paid tips distributed to the employee by their employer and tips received from other employees under any tip-sharing arrangement. All cash tips must be reported to the employer.
• Noncash tips are those of value received in any other medium than cash, such as: tickets, passes or other goods or commodities that a customer gives the employee. Noncash tips aren’t reported to the employer.

Four factors determine whether a payment qualifies as a tip. Normally, all four must apply:

• The customer makes the payment free from compulsion;
• The customer must have the unrestricted right to determine the amount;
• The payment should not be the subject of negotiations or dictated by employer policy; and
• Generally, the customer has the right to determine who receives the payment.

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by IRS – Internal Revenue Service