Checkmark iconCan I Write This Off?

can I write off tips?

TL;DR

Tips paid by a business owner to employees or service providers can be deductible as a business expense, but tips received by the business owner or freelancer are considered income and not deductible.

Detailed Answer

If you are a business owner and you pay tips to employees or service providers as part of your business operations, these tips can be deducted as a business expense under ordinary and necessary expenses. However, if you are a freelancer or independent professional, tips you receive are considered taxable income and cannot be deducted. For example, a restaurant owner can deduct tips paid to waitstaff as part of their payroll expenses. Conversely, a freelance consultant cannot deduct tips received from clients as they are part of their gross income. It's important to distinguish between tips paid out and tips received, as they are treated differently for tax purposes.

Where to Put It on the Tax Form

Schedule C, Line 26 for business expenses related to tips paid out. Tips received are reported as income on Schedule C, Line 1.

Real World Example

A restaurant owner pays $500 in tips to their staff over the course of a month. This amount is included in the payroll expenses and deducted on Schedule C, Line 26. A freelance graphic designer receives $50 in tips from a client, which is reported as income on Schedule C, Line 1.

Audit Risk & Documentation Tips

The audit risk is moderate, especially in cash-heavy businesses like restaurants. Keep detailed records of all tips paid, including dates, amounts, and recipients. For tips received, maintain accurate income records. Use payroll records, receipts, and accounting software to track these transactions.

IRS Reference

IRS Publication 535 (Business Expenses), IRS Publication 15 (Employer's Tax Guide).

Relevant Industries

RestaurantsHospitalityFreelancersConsultants

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Disclaimer: This is for informational purposes only and should not be construed as tax or legal advice. Always consult your tax advisor.

Page created on November 30, 2025

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