--- title: "Do I Pay Tax on Tips I Tip Out?" description: "No, not on the part you pass on. You report only the tips you keep; the coworkers you tip out report their share. Keep a daily record." url: https://www.tipmaxapp.com/us/answers/do-i-pay-tax-on-tips-i-tip-out language: en publisher: TipMax (Entermaurs Incorporated) date_published: 2026-09-23 last_verified: 2026-09-23 --- # Do I pay tax on the tips I tip out? **Short answer:** **No, not on the part you pass on.** For taxes, the IRS says to report only the tips you receive and keep. The coworkers who get your tip-outs report that money themselves. So if you collect $1,000 and tip out $200, you report $800. The trap: you need a daily record of what you paid out and to whom, or you can’t back up the lower number. ## 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**. 1. Tip-out: $1,500 × 0.10 = **$150** ($100 to the busser, $50 to the bar). 2. Tips you keep: $1,500 − $150 = **$1,350**. That’s the number you report to your employer. 3. Your daily record shows the $150 paid out and the names of the two people who got it. 4. 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**. 5. 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?](https://www.tipmaxapp.com/us/answers/tip-out-based-on-sales) ## 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?](https://www.tipmaxapp.com/us/answers/reporting-tip-outs-you-receive) ### 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?](https://www.tipmaxapp.com/us/answers/how-to-record-tip-outs) ### 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?](https://www.tipmaxapp.com/us/answers/tip-outs-and-qualified-tips) ## 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 - [IRS Publication 531, Reporting Tip Income](https://www.irs.gov/publications/p531) - [IRS: Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting) - [IRS: 2026 General Instructions for Forms W-2 and W-3 (box 12 code TP)](https://www.irs.gov/instructions/iw2w3) - [Schedule 1-A (Form 1040)](https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf) ## Last verified September 23, 2026. Checked IRS Publication 531 (tip-splitting and daily records), the IRS tip recordkeeping page, the 2026 W-2 instructions, and Schedule 1-A. ## Related - [I get tip-outs from servers. Do I have to report them?](https://www.tipmaxapp.com/us/answers/reporting-tip-outs-you-receive) - [How do I keep a record of my tip-outs for taxes?](https://www.tipmaxapp.com/us/answers/how-to-record-tip-outs) - [I’m a server. After tip-outs, how much is mine, and which number do I report?](https://www.tipmaxapp.com/us/answers/server-tip-out-math) - [If I tip out bussers or the bar, whose tips count for the deduction?](https://www.tipmaxapp.com/us/answers/tip-outs-and-qualified-tips) ## How TipMax helps with this You report what you kept, so log what you paid out and to whom. TipMax is an iPhone app for servers and bartenders that tracks tips and tip-outs and turns a restaurant menu into study flashcards. - Record tip-outs every shift, with tip-out rules for each job. Download TipMax free: https://apps.apple.com/us/app/tipmax-study-track-earn/id6744850146 --- TipMax Answers explains public IRS and U.S. Department of Labor guidance in plain English for tipped workers. It is **not tax, legal, or accounting advice**. Federal rules are a floor; your state may add its own tip rules. Confirm with IRS.gov, DOL.gov, your state labor agency, or a qualified professional. TipMax the app helps you track tips and tip-outs; it does not file your taxes or decide tip-pool disputes.