Do I pay tax on the tips I tip out?
The short answer
Example math
You’re a server. Say your house has you tip out 10% of your tips to the busser and the bar (illustrative; your house sets its own rule). In one week you collect $1,500.
- Tip-out: $1,500 × 0.10 = $150 ($100 to the busser, $50 to the bar).
- Tips you keep: $1,500 − $150 = $1,350. That’s the number you report to your employer.
- Your daily record shows the $150 paid out and the names of the two people who got it.
- Over the year, say your kept and reported tips come to $20,000, under the $25,000 cap, and your income is under the phase-out. Say your marginal rate is 12% (illustrative; enter your own). Illustrative federal income-tax savings ≈ $20,000 × 0.12 = $2,400.
- Social Security and Medicare still apply to the $20,000. The deduction doesn’t touch them.
Not tax advice. If your tip-out is figured on sales instead of tips, see My tip-out is a percentage of my sales. How does that work?
Check your estimate
Enter the tips you kept after tip-outs, not the whole amount you collected.
Open the calculator
Plain English
For taxes, you report what you keep
If you’re in a tip-splitting or tip-pooling arrangement, the IRS says to report only the tips you receive and retain. Don’t report the part you pass on to other employees, either to your employer or on your tax return.
Your coworkers report what they get
The busser, barback, or bartender who receives your tip-out reports it as their own tips. The same dollars shouldn’t show up on both of your returns. See I get tip-outs from servers. Do I have to report them?
Keep the record that proves it
The IRS says your daily tip record should include the tips you paid out through tip pools or tip splitting, and the names of the employees you paid. That record is what supports reporting the smaller number. See How do I keep a record of my tip-outs for taxes?
The deduction uses the same number
For the federal tip deduction, the tips you kept have to be reported: on your W-2 (for 2026, box 12 code TP) or on Form 4137. The deduction is capped at $25,000 per return and is claimed on Schedule 1-A Part II. It lowers federal income tax only. Social Security and Medicare still apply. For more on whose tips count, see If I tip out bussers or the bar, whose tips count for the deduction?
Common mistakes
- Reporting everything you collected, before tip-outs.
- Reporting only what you kept, with no record of what you paid out or to whom.
- Claiming the deduction on the full pre-tip-out amount.
- Assuming the deduction also cuts Social Security and Medicare.
Official sources
Last verified:
Checked IRS Publication 531 (tip-splitting and daily records), the IRS tip recordkeeping page, the 2026 W-2 instructions, and Schedule 1-A.