5 Money Moves to Make if You Rely on Tips

Quick Answer

If tips make up a large portion of your income, you may be looking for ways to normalize your finances. Budgeting, saving, tax planning and managing credit can help build regularity into the ups and downs of living on tips.

A front view shot of a barista handling tip money behind a counter in a cafe.

For restaurant workers, delivery drivers, hairdressers, bartenders and many other essential workers, tips add up to more than a few extra dollars added onto a check. Tip income sometimes accounts for the majority of a worker's income. Federal law only requires employers to pay tipped workers $2.13 an hour, as long as tips bring their income over the minimum wage threshold of $7.25, though state minimum wage laws vary.

The challenge: Tip income can fluctuate. Average tips declined between 2021 and 2022, according to restaurant technology company Popmenu. In their November 2022 survey, 43% of consumers reported tipping servers 20% or more, compared to 56% in 2021; 32% tipped delivery drivers 20% or more, down from 38% in 2021. If your income comes largely from tips, consider these five money moves to put yourself on firm financial footing.

1. Create a Budget

Budgeting works for anyone, but it's especially helpful when your income is unpredictable. The ups and downs of tip income aren't all bad: When you have a good day, you've got cash to spend. Unfortunately, your regular finances aren't as flexible. Rent, car payments, credit card bills and utilities are just some of the recurring expenses you must pay on time every month.

A budget gives you guideposts, so you know how much money you need to pay bills, feed yourself and your family, and set aside for future expenses. A budget helps normalize your spending, so you don't blow your cash one day and come up short the next. Here are five easy steps to making a budget.

Track Your Spending

Gather up your bank statements and tip records for the past three to six months, if you have them. If not, try to track your wages, tips and spending, week by week, for the next few months to get a sense of your average income and expenses. Using a budgeting app may help.

Calculate Your Expenses

Total up your average monthly expenses in these categories:

  • Fixed expenses like your rent and car payment
  • Variable expenses like food and utilities
  • Periodic expenses like servicing your car or financing the holidays

Estimate Your Average Income

Going back as far as you can, average out what you earn in wages and tips in a typical week. If you just started your job, make your best estimate and recheck your math in a few months.

Pay Yourself a Regular Salary

Instead of pocketing your tips and hoping they'll last through the month, try depositing money into savings and paying yourself a regular salary based on average wages and tips for the week or month. Your salary should cover basic expenses and variables like food and utilities.

Budget for Basics, Save for Extras

Try to set a salary that leaves some of your wages and tip income in savings every week. You can use the extra money for large expenses and emergencies.

2. Beef up Your Emergency Fund

Speaking of savings, having an emergency fund is critical when you rely on tip income. Savings are your key to covering unexpected expenses, weathering slow work periods and even surviving unemployment. Aim for three to six months' worth of expenses as emergency savings.

In addition to maintaining an emergency fund, you may want to keep an additional month's worth of basic expenses in your checking account as a cushion. That way, you can pay yourself on time even if your paycheck is late, you took a few sick days or you're in a tipping drought. Don't forget to repay yourself when you have the money to do so.

3. Handle Cash Wisely

Accepting tips typically means dealing with cash. There are multiple benefits to having cash on hand, but there are safety and budgeting considerations as well.

First, make sure you have a safe way of storing and depositing cash. Be careful about carrying large amounts of cash with you. Don't leave money lying around where it's easily stolen or lost. Make a weekly (or more frequent) trip to the bank to deposit bills, so you don't end up with a stockpile hidden under your mattress (and, by the way, don't hide bills under your mattress).

4. Plan for Taxes

You must pay income, Social Security and Medicare taxes on the tips you receive. If your employer uses an electronic tip reporting system, use it to report your daily cash and credit or debit card tips to your employer, who will withhold taxes on your tip income from your paychecks.

You may also record your daily tips in a tip diary that shows your name, your employer's name, the date and the cash, card and noncash tips (such as tickets or other gifts) you've received. Report your cash and card tips to your employer unless you've received less than $20 in tips for the month. You do not need to report noncash tips to your employer, though you will need to report them on your tax return.

Keep your tip record or daily paper receipts from your employer's reporting system with your tax returns. If you have tip income that has not been reported to your employer, file Form 4137 along with your taxes. Failing to pay taxes on your tips or under-reporting throughout the year and having too little tax withheld may result in penalties.

5. Control Your Credit

Credit can be a help or a hindrance when you have an irregular income. If you maintain good credit and pay your entire card balance in full every month, credit can help you smooth out the minor ups and downs of living on tip income. Credit cards are also a safe way to pay for large purchases you don't want to pay for in cash. If you have a flat tire and need to fix it now, paying with credit gives you flexibility.

That's the upside. The downside: When your income is irregular, it's easy to rely on credit to make up for a slow week. When the bill arrives, you may not have the money to pay your full balance. Once you run up a balance, it may be difficult to make your minimum payments on time. Late payments can hurt your credit score, and a negative cycle may begin.

Maintaining control of your credit is key. If you're worried that overusing your credit cards will lead to overspending—and debt that's difficult to repay—keep your cards in reserve and only use them strategically.

The Bottom Line

Tip income can put your finances on a rollercoaster. Budgeting, saving and planning for taxes can help you maintain your financial equilibrium and meet your regular obligations, even with irregular income.

Through it all, don't underestimate the value of good credit. You'll need it to get the best rates and terms on auto loans, mortgages, credit cards and personal loans—tools that help you finance life's big-ticket items. Mind your credit card usage, pay your bills on time and check your credit report and credit score at least once a year to make sure you're on track.