Yes, tips earned in Texas are taxable, but only at the federal level. Texas has no state income tax on personal earnings, so the taxes you owe on tip income are federal income tax plus Social Security and Medicare. A new federal deduction that took effect in the 2025 tax year lets many tipped workers subtract up to $25,000 of qualified tips from their taxable income, which can sharply reduce or eliminate the income tax owed on those earnings.
Which Taxes Apply to Your Tips
Every dollar you receive in tips counts as gross income on your federal return. That includes cash left on the table, tips charged to a credit card and paid out through your employer, your share of any tip pool, and non-cash tips such as tickets or event passes valued at fair market value.1Internal Revenue Service. Publication 531 (12/2024), Reporting Tip Income Non-cash tips go on your tax return but not on the monthly report to your employer.2Internal Revenue Service. Tip Income Is Taxable and Must Be Reported
Tips are also subject to FICA. You pay 6.2% for Social Security and 1.45% for Medicare, and your employer matches each.3Internal Revenue Service. Social Security and Medicare Withholding Rates Your employer withholds your share from your paycheck, but only on the tips you report. If your total wages (from all sources) go above $200,000 in a calendar year, an additional 0.9% Medicare tax applies to earnings over that threshold.
One narrow exception: if your cash tips from a single employer come to less than $20 in a calendar month, those tips are not subject to FICA. You still include them as taxable income on your federal return.4Office of the Law Revision Counsel. 26 USC 3121 – Definitions Once your monthly tips from that employer hit $20, the full amount becomes subject to FICA.
The New Deduction for Tipped Workers (2025–2028)
Legislation signed as part of the One, Big, Beautiful Bill created a federal income tax deduction for qualified tips received in tax years 2025 through 2028. It applies to workers in tipped occupations including wait staff, bartenders, salon workers, personal trainers, and gig economy workers, and it covers voluntary cash and charged tips received from customers or through tip-sharing arrangements.5Internal Revenue Service. How to Take Advantage of No Tax on Tips and Overtime
The deduction is capped at $25,000 per year and phases out once your modified adjusted gross income passes $150,000, or $300,000 for joint filers.6Internal Revenue Service. Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025 Self-employed workers face a second limit: the deduction cannot exceed net income from the business where the tips were earned.
The deduction reduces federal income tax only. It does not eliminate Social Security or Medicare tax on your tips, and it does not change the obligation to report tips to your employer or track them for filing. The reporting and withholding rules below still apply in full.
Tips Versus Mandatory Service Charges
Not every extra line on a customer’s bill is a tip. A payment counts as a tip only when the customer freely chooses the amount. Automatic gratuities added to the bill for large parties, for example, are classified as service charges rather than tips.
When your employer hands you a share of a mandatory service charge, that money is treated as regular wages. Federal income tax, Social Security tax, and Medicare tax are withheld from it like any other paycheck, and it does not pass through the monthly tip-reporting process.7Internal Revenue Service. Tip Recordkeeping and Reporting Voluntary tips follow the tip rules described below.
How to Report Your Tips
Keep a daily log of every tip you receive. Record the date, cash amounts, credit card tip totals, and the fair market value of any non-cash tips. Then report your total tip income to your employer by the 10th of the month after the month you earned the tips.8Internal Revenue Service. Topic No. 761, Tips – Withholding and Reporting Most employers accept the report on IRS Form 4070 or through an internal electronic system.7Internal Revenue Service. Tip Recordkeeping and Reporting
Reporting on time lets your employer withhold the right amount each pay period, which keeps you from facing a large bill at filing. Hold on to your daily logs for at least four years from the date you file.9Internal Revenue Service. Recordkeeping
Tips you reported to your employer show up in Box 1 of your W-2 with your other wages. Any tips you did not report must go on Form 4137 with your return, which calculates the Social Security and Medicare taxes owed on the unreported amount.2Internal Revenue Service. Tip Income Is Taxable and Must Be Reported
Allocated Tips on Your W-2
If you work at a large food or beverage establishment, generally one with more than 10 employees on a typical business day, your employer may have to allocate tips to you when the total tips reported by all staff fall below 8% of gross food and beverage receipts.10Internal Revenue Service. Instructions for Form 8027 Allocated tips show up in Box 8 of your W-2. They are not in Box 1, and no taxes have been withheld on them.
You still have to report those amounts as income and pay the taxes on them unless your daily log or other records show you actually received less. Good daily records are your main defense against being taxed on tips you never received.
Penalties for Not Reporting Tips
If you fail to report tips to your employer, the penalty is 50% of the Social Security and Medicare taxes owed on the unreported amount, on top of the taxes themselves.1Internal Revenue Service. Publication 531 (12/2024), Reporting Tip Income So if the FICA on your unreported tips comes to $400, you would owe another $200 in penalty before any interest.
You can avoid the penalty by showing reasonable cause, which means attaching a written explanation to your return describing why the tips were not reported.1Internal Revenue Service. Publication 531 (12/2024), Reporting Tip Income There is also a longer-term cost: unreported tips mean lower Social Security wage credits, which can reduce your future retirement and disability benefits.
Tip Pooling
Federal law allows employers to require tip pooling, where employees contribute part of their tips to a shared pool that gets redistributed. When the employer takes a tip credit against the minimum wage, only employees who customarily and regularly receive tips can be in the pool, and your employer has to tell you about any required pool contribution as a condition of using that credit.11eCFR. Subpart D Tipped Employees
Whether or not a tip credit is used, managers, supervisors, and owners with at least a 20% equity interest cannot keep any portion of employee tips or share in the pool.12U.S. Department of Labor. Fact Sheet #15B – Managers and Supervisors Under the FLSA and Tips That restriction holds even for a shared tip jar.
Your Paycheck Under Texas Tip Credit Rules
Texas ties its minimum wage for tipped employees to the federal rule. Under Texas Labor Code Section 62.052, the wage an employer must pay a tipped worker is the amount set by the Fair Labor Standards Act, currently $2.13 per hour in direct cash wages.13State of Texas. Texas Labor Code Section 62.052 – Tipped Employees The employer takes a tip credit of up to $5.12 per hour to reach the $7.25 federal minimum.14U.S. Department of Labor. Fact Sheet #15 – Tipped Employees Under the Fair Labor Standards Act
Before claiming the tip credit, your employer has to tell you, orally or in writing:
- The direct hourly cash wage being paid, at least $2.13.
- How much of your tips the employer is counting toward the minimum wage, up to $5.12.
- That you keep all tips except for valid tip pool contributions.
- That the tip credit does not apply unless you have been informed of these provisions.
An employer who skips this notice loses the right to claim the tip credit.14U.S. Department of Labor. Fact Sheet #15 – Tipped Employees Under the Fair Labor Standards Act And if your cash wage plus reported tips comes out below $7.25 per hour in any pay period, the employer has to make up the difference. The risk of a slow shift stays with the employer, not you.