Reporting tips correctly (and why FICA still applies)

The 2026 tips deduction changes your income tax, not your reporting duties or your payroll taxes. Getting the reporting right is what makes the deduction usable, so it is worth understanding how the pieces fit together.

You still report tips to your employer

Employees who receive tips are generally required to report them to their employer, who withholds and reports payroll taxes on them. The deduction does not remove that step. Keep your own record of tips received, since your reported total is the figure that flows onto your return and into this deduction.

FICA taxes are unchanged

Tips remain subject to Social Security and Medicare taxes, collectively called FICA. The "no tax on tips" phrase refers only to a federal income tax deduction. Your tips are still counted for FICA, which is also what keeps them counting toward your future Social Security benefits. Do not expect the deduction to reduce the FICA line on your pay stub.

How the deduction sits on top

When you file, your reported tips are part of your income. The deduction then subtracts up to $25,000 of qualified tips from the income you are taxed on, subject to the MAGI phaseout. Because it is above the line, you can take it with the standard deduction or while itemizing. Married filers must file jointly to claim it.

Keep good records

A simple tip log, plus your pay stubs and year-end wage statement, lets you confirm the qualified-tips figure and reconcile it with what your employer reported. If the numbers differ, ask your employer or payroll department before you file rather than overriding the reported amount.

This guide is general information, not tax advice.