Federal: Income Tax on Tips (2025-2028)

For the 2026 filing year (reporting 2025 income), tips are still considered taxable income and must be reported to both your employer and the IRS; however, under current federal law effective for tax years 2025 through 2028, eligible workers may be able to exclude or deduct a portion of their tip income from federal income tax, depending on final IRS guidance and income limits. Even when a federal income-tax deduction or exclusion applies, tips remain subject to payroll taxes (Social Security and Medicare/FICA), and employers must continue withholding and reporting them on Form W-2. Cash and charged tips must still be tracked and reported, and state and local taxes may still apply unless a state specifically provides an exemption. In short, tips are not completely tax-free in 2026—they may receive favorable federal income-tax treatment, but FICA and most state tax obligations generally remain in place.