Yes, tips are taxed in Oregon. Tip income is subject to federal income tax, Oregon state income tax, and payroll taxes including Social Security, Medicare, the statewide transit tax, and Paid Leave Oregon contributions. A federal deduction signed into law in 2025 lets many tipped workers reduce or eliminate the federal income tax owed on qualified tips starting with the 2025 tax year, but it does not touch payroll taxes, and Oregon’s treatment depends on how state conformity plays out.
The New Federal Deduction for Tip Income
The One, Big, Beautiful Bill signed into federal law includes a deduction for tip income that the IRS says will benefit millions of workers who report tips on their returns. Tipped workers can begin claiming it on federal returns during the current filing season.1Internal Revenue Service. How to Take Advantage of No Tax on Tips and Overtime It is a federal income tax deduction only. Social Security and Medicare tax still apply to your tips at the standard rates.
The deduction also applies only to qualified tips. Service charges classified as regular wages are excluded.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
How this deduction affects your Oregon return depends on state conformity. Oregon generally uses your federal adjusted gross income as the starting point for calculating state tax, so a deduction that reduces federal AGI would automatically lower Oregon taxable income. Because the law is new, check with the Oregon Department of Revenue or a tax professional for the current state-level treatment before you file.
Federal Income Tax and FICA on Tips
All tips count as taxable income on your federal return, whether they come as cash, credit card charges, or a share from a tip pool. If you earn $20 or more in tips during any calendar month from a single employer, you must report the total to that employer by the 10th of the following month.3Internal Revenue Service. All Income Is Taxable, Including Gig Economy and Tip Income Your employer then withholds federal income tax, Social Security tax, and Medicare tax from your regular paycheck based on what you reported.
You and your employer split the cost of Social Security and Medicare. For 2026, the Social Security rate is 6.2% each on wages and tips up to $184,500, and the Medicare rate is 1.45% each with no wage cap.2Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide If you don’t report tips to your employer, you’re still on the hook for the employee share. You calculate and pay it with Form 4137 when you file.4Internal Revenue Service. Social Security and Medicare Tax on Unreported Tip Income
Oregon State Income Tax on Tips
Oregon has a progressive income tax. Your tip earnings are combined with your regular wages and any other income when the state calculates what you owe. Oregon’s top marginal rate is among the higher rates nationally, so tipped workers earning above a modest income level can face a meaningful state tax bill on top of federal obligations. The exact rate depends on your filing status and total income; the Oregon Department of Revenue publishes updated rate tables and instructions each year.
Oregon Payroll Taxes That Apply to Tips
Two Oregon-specific payroll taxes come out of your tip income along with your regular wages.
Statewide Transit Tax
Oregon’s statewide transit tax applies to all wages, including reported tips. Established under ORS 320.550, the rate is one-tenth of one percent (0.1%) of your total wages, withheld automatically. The Oregon Legislature passed an increase to 0.2% effective January 1, 2026, but a ballot referral is pending, so the original 0.1% rate remains in effect until voters weigh in.5Oregon Department of Revenue. Statewide Transit Tax
Paid Leave Oregon
Paid Leave Oregon also applies to tip income. For 2026, the total contribution rate is 1% of wages, split between employees (0.6%) and employers with 25 or more employees (0.4%).6State of Oregon Employment Department. Unemployment Insurance Tax and Paid Leave Oregon Contribution Rates for 2026 Your employer withholds the employee portion based on your total wages, including reported tips. Small employers with fewer than 25 employees don’t pay the employer share, but the employee contribution still applies.
You Still Get the Full Minimum Wage
Oregon is one of the states that prohibits employers from counting your tips toward the minimum wage they owe you. Under state law, employers may not include any amount an employee receives as tips when determining whether they have met the minimum wage requirement.7Oregon State Legislature. Oregon Revised Statutes 653.035 – Deducting Value of Lodging, Meals and Other Benefits Furnished by Employer; Treatment of Commissions and Tips Your base wage lands in your check first; tips are on top of that.
Oregon’s minimum wage varies by region and adjusts annually on July 1. For July 1, 2025, through June 30, 2026, the rates are:8State of Oregon. Oregon Minimum Wage
- Portland metro: $16.30 per hour, within the urban growth boundary covering parts of Clackamas, Multnomah, and Washington counties
- Standard: $15.05 per hour across most of the remaining populated areas of the state
- Non-urban counties: $14.05 per hour in Baker, Coos, Curry, Douglas, Klamath, and other rural counties
Rates for the period beginning July 1, 2026, will be announced by BOLI no later than April 30, 2026, based on changes to the Consumer Price Index.9State of Oregon. BOLI – Minimum Wage Increase Schedule The tax picture matters more here than in tip-credit states because every dollar in tips is layered on top of a full minimum wage, all of it taxable.
Service Charges Are Not Tips
When your employer adds an automatic charge to a customer’s bill, such as a mandatory gratuity for a large party, that payment is not a tip under federal tax law even if the employer passes it to you. The IRS classifies these as service charges, and they’re treated as regular wages.10Internal Revenue Service. Tip Recordkeeping and Reporting Income tax, Social Security, and Medicare come out just like any other paycheck wages.
The distinguishing feature is customer choice. A payment qualifies as a tip only when the customer freely decides whether and how much to pay, with no amount dictated by employer policy. If the amount is preset, the customer can’t change it, or the employer controls who receives it, the payment is a service charge.10Internal Revenue Service. Tip Recordkeeping and Reporting The distinction matters at tax time: the new federal tip deduction applies only to qualified tips, not to service charges classified as regular wages.
Reporting Your Tips
Keeping a daily log of your tip income is the single most important step for staying in compliance. For each shift, record the date, cash tips from customers, credit card tips, and any amounts contributed to or received from a tip pool. IRS Publication 1244 includes Form 4070A as a template, though any consistent daily record works.11Internal Revenue Service. Publication 1244 – Employee’s Daily Record of Tips and Report to Employer
At the end of each month, transfer your daily totals to IRS Form 4070 and give it to your employer by the 10th of the following month. Your employer uses that information to withhold the correct taxes from your regular pay. Keep the records for at least three years, or six years if your unreported income exceeds 25% of the gross income shown on your return.12Internal Revenue Service. How Long Should I Keep Records?
If you participate in a tip pool, report only the amount you actually kept after the pool distribution, not the full amount customers gave you. Track both the total received and what you shared with coworkers.
Large food and beverage establishments (generally those with more than ten employees who collectively work over 80 hours on a typical business day) have an extra step. When total tips reported by all employees fall below 8% of gross receipts, the employer must allocate the difference among tipped employees and report the allocated amount in a separate box on your W-2.13Internal Revenue Service. Topic No. 761, Tips – Withholding and Reporting Allocated tips aren’t in Box 1 wages, so you have to add them to your income yourself when you file.
Penalties for Underreporting
Failing to report tips to your employer carries a specific federal penalty: 50% of the Social Security and Medicare tax owed on the unreported amount.14Office of the Law Revision Counsel. 26 USC 6652 – Failure to File Certain Information Returns, Registration Statements, Etc. If you failed to report $2,000 in tips and owed $153 in combined Social Security and Medicare tax, you could face an additional $76.50 penalty on top of the tax.
You can avoid this penalty by showing the failure was due to reasonable cause and not willful neglect, attaching a statement of the circumstances to your return.4Internal Revenue Service. Social Security and Medicare Tax on Unreported Tip Income Underreported income can also trigger accuracy-related penalties and interest on the unpaid balance. The Oregon Department of Revenue can impose its own penalties and interest on state taxes owed from unreported income.
Filing Tips on Your Oregon Return
Tips you reported to your employer during the year appear in Box 1 of your W-2 along with your regular wages. That total flows to Form OR-40 when you prepare your Oregon individual income tax return. The Department of Revenue accepts electronic filings through its Revenue Online portal or by mail. For tax year 2025, returns are due April 15, 2026.15Oregon Department of Revenue. 2026 Tax Season Opens January 26
Tips you didn’t report to your employer still belong on your federal return (Form 1040, line 1c) and on your Oregon return. Use Form 4137 to calculate the Social Security and Medicare tax on unreported tips, and carry that amount to Schedule 2 of your federal return.4Internal Revenue Service. Social Security and Medicare Tax on Unreported Tip Income Any tips your employer allocated because the restaurant’s reported total fell below 8% also get added to your income.16Internal Revenue Service. Tips Confirming that your W-2 matches the totals you reported through the year keeps you clear of discrepancies that draw a second look from either the IRS or the Oregon Department of Revenue.