Tips are wages. The tips you report to your employer count toward your pay the same as an hourly wage does — they're subject to Social Security tax, Medicare tax, and federal income tax withholding, just like the money on your regular paycheck. The IRS doesn't treat cash from a customer any differently than a base wage from your boss.
When your reported tips get run through payroll, Payrollix folds them into your gross pay before it calculates tax. So the taxes come out of your total earnings — cash wages plus tips — not just the cash wages your employer hands you.
What comes out
On the wages-and-tips total, the employee side of the payroll taxes is:
- Social Security — 6.2%, up to a wage base of $184,500 for 2026 (the most anyone pays into Social Security this year is $11,439.00).
- Medicare — 1.45% on all wages, with no cap. If your total pay for the year goes over $200,000, an extra 0.9% Additional Medicare applies to the amount above that.
- Federal income tax — withheld based on the W-4 you filed. Tips are part of the wages this is figured on.
Social Security and Medicare together are called FICA — 7.65% total on the employee side, up to the Social Security cap. Your employer pays a matching 7.65% on their end, but that half never comes out of your check.
Why the withholding can look huge
Here's the part that surprises tipped workers. If you earn most of your money in tips and get a small hourly cash wage, your paycheck can show taxes larger than the cash portion — sometimes wiping out most or all of the cash. That's not a mistake. The taxes are calculated on the whole amount (cash wages plus tips), but they can only be collected from the cash your employer actually pays you, because you already pocketed the tip money directly. So a $60 cash wage with $300 in reported tips gets taxed like $360 of pay, and that tax bill comes out of the $60.
If your cash wages aren't enough to cover the taxes owed, you may see little to nothing deposited that period, and your employer will report any uncollected Social Security and Medicare on your W-2 for you to settle at tax time.
How tips show up on your paystub
Your reported tips are part of the gross pay your paystub is built on, and the FICA and income tax lines reflect the tipped total. To open a stub and read the Earnings and Taxes sections line by line, see Paystubs & tax documents.
One more distinction: reporting your tips to your employer is what makes them show up here and get taxed through payroll. Tips you don't report don't run through this system — but you're still required to report tip income to the IRS, so reporting them through your employer keeps it clean.
Related: Paystubs & tax documents · Gross pay vs. net pay · How to fill out your W-4