Yes, Illinois does tax tips. The state applies its flat 4.95% income tax to all tip income, and federal income tax plus Social Security and Medicare taxes apply on top of that. A new federal deduction that started with 2025 returns can shelter up to $25,000 of qualified tips from federal income tax, and because Illinois calculates tax from your federal adjusted gross income, that break can lower your state bill too.
How Illinois Taxes Your Tips
Illinois uses a single flat rate of 4.95% on net income, and tip income is part of that base like any other wages.1Illinois General Assembly. 35 ILCS 5/201 – Tax Imposed The state starts its calculation from your federal adjusted gross income, so every tip dollar reported on your federal return is automatically part of your Illinois tax base. The math is straightforward: multiply your net income by 0.0495 to get your Illinois liability before credits.
Illinois does not have a separate deduction for tip income. If a federal deduction reduces your AGI, that reduction carries through to Illinois. If it doesn’t, the tips remain taxable at 4.95%.
If You Live in a Neighboring State and Work in Illinois
Illinois has reciprocal tax agreements with Iowa, Kentucky, Michigan, and Wisconsin. If you live in one of those states but work at a tipped job in Illinois, you don’t pay Illinois income tax on your wages and tips. You owe tax only to your home state.2Illinois Department of Revenue. Filing Requirements
Federal Income Tax and the New Tips Deduction
The IRS treats every tip dollar the same as hourly wages. Cash tips, credit and debit card tips, and non-cash tips like event tickets all count as gross income.3Internal Revenue Service. Tip Recordkeeping and Reporting
Starting with 2025 tax returns filed in 2026, eligible tipped workers can deduct up to $25,000 in qualified tip income from federal income tax. The deduction was enacted as part of the One Big Beautiful Bill Act and is available whether you take the standard deduction or itemize. It phases out for single filers with income above $150,000 and joint filers above $300,000.4U.S. Department of the Treasury. Treasury and IRS Issue Proposed Regulations Around No Tax on Tips
Two things about this deduction matter for Illinois workers. First, it applies only to federal income tax; it doesn’t touch Social Security or Medicare. Second, because it reduces your federal AGI, the benefit flows through to your Illinois return as well. It’s worth confirming with whoever prepares your taxes that the deduction is claimed.
Social Security and Medicare Still Apply
The new deduction doesn’t change FICA. Your tips remain subject to Social Security tax at 6.2% and Medicare tax at 1.45%, a combined 7.65% employee share, matched by your employer. The Social Security portion applies only up to the wage base of $184,500 for 2026.5Social Security Administration. Contribution and Benefit Base If you earn more than $200,000 as a single filer or $250,000 filing jointly, an extra 0.9% Medicare tax applies on the amount above those thresholds.
When tips are not reported to your employer, no FICA withholding happens. You still owe your share, and you settle it by filing Form 4137 with your federal return.6Internal Revenue Service. Form 4137 – Social Security and Medicare Tax on Unreported Tip Income
Reporting Tips to Your Employer
Federal law requires you to report your tips to your employer in writing by the 10th day of the month after the month you earned them. If the 10th falls on a weekend or holiday, the deadline moves to the next business day.7Internal Revenue Service. Publication 531 – Reporting Tip Income The report goes to your employer, not directly to the IRS. Most employers use IRS Form 4070 or an equivalent electronic system.
One exception: if your tips from a single employer come in under $20 in a calendar month, you don’t have to report them to that employer.3Internal Revenue Service. Tip Recordkeeping and Reporting The threshold is per employer, so $15 at each of two jobs in the same month means neither has to be reported. Those tips are still taxable income on your annual return. The $20 rule only governs the report to your employer.
Keep a Daily Tip Record
The IRS expects a daily log. You can use IRS Form 4070A from Publication 1244 or any method that captures the same information. For each workday, record the date, cash tips received directly from customers, credit and debit card tips paid to you by your employer, the value of any non-cash tips, and any amounts you paid out to other employees through tip pools or splitting.7Internal Revenue Service. Publication 531 – Reporting Tip Income
This log is your defense if anything is questioned. Without one, the IRS can estimate your tip income using methods that rarely favor the worker, like assuming your tips matched a percentage of the restaurant’s total sales.
Withholding and Estimated Payments in Illinois
Once you report tips, your employer adds them to your regular wages for withholding. Federal income tax, Social Security, Medicare, and Illinois 4.95% income tax all come out of your paycheck based on the combined total.
Here’s where tipped workers often get caught: in a heavy tip month, your hourly wages may not be large enough to cover everything owed. What your employer can’t collect shows up as uncollected tax, and you still owe it. If your total Illinois liability after withholding and credits will exceed $1,000 for the year, you have to make quarterly estimated tax payments to the Illinois Department of Revenue.8Illinois Department of Revenue. 2026 IL-1040-ES Estimated Income Tax Payments for Individuals Otherwise, you settle up when you file your annual return.
What Happens if You Don’t Report Tips
The penalty for failing to report tips to your employer is 50% of the Social Security and Medicare taxes owed on the unreported amount, in addition to the taxes themselves. It applies unless you can show reasonable cause.9Office of the Law Revision Counsel. 26 USC 6652 – Failure to File Certain Information Returns, Registration Statements, Etc. “I forgot” or “everyone does it” doesn’t qualify. You’d need something like a documented illness or a genuine, evidence-backed misunderstanding.
Unreported tips can also trigger the accuracy-related penalty of 20% on any resulting federal income tax underpayment if the IRS calls the shortfall negligent or a substantial understatement. These penalties stack. A worker with $10,000 in unreported tips could face the regular income tax, the FICA taxes, the 50% FICA penalty, and a 20% accuracy penalty on top. With the new federal tips deduction now sheltering a large portion of tip income from income tax anyway, underreporting rarely makes sense.