Waiters, bartenders, rideshare drivers, hair stylists, and other tipped workers have something to look forward to this tax season: the new “No Tax on Tips” deduction. For the first time ever, you may be able to deduct tips on the federal income tax return to file this year.
The tip deduction is one of several new tax deductions created by the “One Big Beautiful Bill,” which was signed into law in July 2025. However, despite the “No Tax on Tips” label, the tip deduction doesn’t completely eliminate taxes on tips. The deductible amount is limited, it isn’t available to every worker who receives tips, some tips aren’t deductible, and tips are still subject to other types of taxes. Plus, there’s some confusion around how to determine which tips are deductible on the tax return you’ll file in 2026.
So, in short, there’s a lot of uncertainty surrounding the “No Tax on Tips” deduction. But don’t worry—we’ll sort it all out by answering the most pressing questions people have about the new tip deduction.
Who Qualifies for the Tip Deduction?
Assuming you have “qualified tips” (we’ll explain what that means in a minute), you can claim the tip deduction if all of the following are true:
- Your modified adjusted gross income (MAGI) is less than $400,000 ($550,000 for married people filing a joint return).
- You have a Social Security number that’s valid for work in the U.S. and issued before the deadline for filing your return (including any tax filing extensions).
- Your filing status is anything other than “Married Filing Separately.”
Young and the Invested Tip: Unless you claim deductions or tax exemptions for foreign income or housing costs, or have tax-exempt income from certain U.S. territories, your MAGI will be the same as your adjusted gross income (AGI) reported on Line 11a of Form 1040 or Form 1040-SR.
Do I Have to Itemize to Claim the Tip Deduction?
You can claim either the standard deduction or itemized deductions on your federal income tax return—but not both. However, for purposes of claiming the tip deduction, it doesn’t matter which one you pick.
That’s because the tip deduction is a “below-the-line” deduction, which simply means the line on your tax return where the deduction is subtracted from your income (Line 13b) is below the line where your AGI is found (Line 11a).
Below-the-line deductions aren’t tied to either the standard deduction or itemized deductions, so you can claim them whether you take the standard deduction or itemize.
What Tips Qualify for the Tip Deduction?
You can only deduct “qualified tips.” But since there are several conditions and restrictions that come with this requirement, not every tip is deductible.
For instance, only cash tips can be qualified tips. This generally includes tips that are paid by:
- credit card
- debit card
- gift card
- check
- tokens that can be exchanged for a fixed amount of cash (e.g., casino chips)
- other forms of electronic payment (e.g., through a payment app like PayPal)
Non-cash tips—such as concert tickets, meals, free services, or digital assets like cryptocurrency—aren’t deductible.
In addition, only tips you get while working in a job that “customarily and regularly” received tips before 2025 (according to the IRS) qualify for the tip deduction. There’s a complete list of jobs that satisfy this requirement on the IRS website.
Qualified tips must also be:
- paid voluntarily
- non-negotiable
- determined by the customer
As a result, mandatory amounts automatically added to a customer’s bill—such as service charges or set gratuities for large parties—generally aren’t deductible because they’re not voluntary or determined by the customer.
Tips received through a “tip pool” or other type of tip-sharing arrangement between employees are deductible. But you can’t deduct tips earned through illegal acts, prostitution, or pornography.
You also can’t deduct a tip you get from your employer, or from a business that you own (or partly own).
Young and the Invested Tip: The tax law also includes a provision preventing the deduction of tips received by anyone working for a “specified service trade or business” (SSTB), which includes businesses in the health, law, accounting, performing arts, athletics, and financial services industries. However, the IRS will not enforce that provision until after it issues final regulations on how to determine whether a business is an SSTB for tip deduction purposes.
Related: Guide to the New Senior Tax Deduction
How Much Is the Tip Deduction?
Most people can only deduct the first $25,000 of qualified tips received during the year. So, for example, if you earn $30,000 in tips for the year, only $25,000 is potentially deductible—the remaining $5,000 is not.
Plus, if you’re self-employed, the deduction for tips received through your business can’t exceed the business’s net income (before factoring in the deduction) for the year. If you own multiple businesses, apply this limit separately to each business.
However, higher-income taxpayers might not even be able to deduct the $25,000 maximum (or an amount equal to the net income of their business). That’s because your deduction is gradually reduced if your MAGI exceeds $150,000 ($300,000 for joint filers). If the phase-out is triggered, your deduction is cut by $100 for each $1,000 of MAGI over the $150,000 (or ($300,000) limit.
Example: Greyson is single and earned $15,000 in qualified tips in 2025. His MAGI for 2025 is $172,000. Since his MAGI is $22,000 over the $150,000 limit for single taxpayers, Greyson’s $15,000 tip deduction is reduced by $2,200. To calculate the reduction, first divide $22,000 by 1,000, which equals $22. Then multiply that amount by $100, which comes to $2,200. As a result, Greyson can only deduct $12,800 of his tips ($15,000 – $2,200 = $12,800).
Using this formula, the maximum tip deduction ($25,000) is completely phased out if your MAGI reaches $400,000 ($550,000 for a joint return). If you receive less than $25,000 of qualified tips, a lower MAGI amount will reduce your deduction to $0.
Related: New SALT Deduction Cap: How It Works and Who It Helps
How Much Will the Tip Deduction Lower My Tax Bill?
Even if you qualify for the maximum tip deduction of $25,000, that doesn’t mean your tax bill will go down by that amount. That’s because tax deductions—unlike tax credits—don’t reduce the tax you owe on a dollar-for-dollar basis.
Instead, the tip deduction simply lowers your taxable income. That’s still a pretty good thing, since less taxable income still translates to a smaller tax bill. However, your actual savings are only a fraction of the total deduction amount—and the fraction used is based on the tax rate associated with your tax bracket.
Example: Dave is single and qualifies for a $25,000 tip deduction for the 2025 tax year. The deduction drops his 2025 taxable income from $100,000 to $75,000 (both amounts are in the 22% tax bracket for single filers). Without the deduction, Dave would owe $16,914 in taxes. With the deduction, he only owes $11,414—for a total savings of $5,500 ($25,000 x .22 = $5,500).
And the savings will be even greater if the tip deduction drops you down to a lower tax bracket!
Related: When and How to Adjust Your Tax Withholding
How Do I Know How Much I Received in Qualified Tips?
Since the One Big Beautiful Bill wasn’t enacted until the middle of last year, the IRS felt that businesses needed more time to adjust their tip reporting processes to account for the new tip deduction. As a result, the tax agency declared a “transition period” when it comes to reporting tip income to workers.
So, employees won’t necessarily see their “qualified tips” reported on their W-2 forms for the 2025 tax year. Employers can report qualified tips in Box 14 of an employee’s W-2 form for 2025—but they don’t have to. They can also provide a separate statement containing that information—but, again, it’s not mandatory.
Likewise, freelancers and other independent contractors won’t see that information on their 1099 forms, either.
So, how do you know how much you received in qualified tips in 2025? If you’re an employee who doesn’t find that information in Box 14 of your W-2 or on a separate statement from your boss, you can use:
- the total amount of Social Security tips reported in Box 7 of your W-2 form
- the total amount of tips reported to your employer on Form 4070 (or any similar substitute form used to report monthly tips to your employer)
- any amount listed on Line 4 of a Form 4137 filed with your 2025 return and included as income on the return
If you’re self-employed, you can use earnings statements or other records, including receipts, point-of-sale system reports, daily tip logs, third-party payment processor statements, or other documents that show qualified tips received in 2025.
What about tips received in 2026? The IRS is updating Forms W-2, 1099-NEC, 1099-MISC, and 1099-K so that employers, as well as people or businesses paying independent contractors, can separately report qualified tips received in 2026 on those forms.
The forms will also have a box for “Treasury Tipped Occupation Codes,” which are numbers tied to different jobs that the IRS says “customarily and regularly” received tips before 2025. Again, the IRS has a complete list of these jobs and their codes on its website.
So, when you file your tax return for the 2026 tax year (which you’ll do in 2027), you can get most of the information you need to claim the tip deduction from these forms.
Related: 4 New Tax Deductions In the ‘One Big Beautiful Bill’
How Do I Claim the Tip Deduction?
You must calculate and claim the “No Tax on Tips” deduction on Schedule 1-A. The tip deduction is then added to any deductions for overtime pay, car loan interest, and people at least 65 years old—with the combined total reported at the very end of Schedule 1-A.
That total is then reported as a “below-the-line” deduction on Line 13b of Form 1040 or Form 1040-SR. It’s then subtracted from your AGI—along with any other below-the-line deductions (including the standard deduction or itemized deductions)—to arrive at your federal taxable income.
Related: When Are Taxes Due? [2026 Tax Deadlines]
What Taxes Still Apply to Tips?
The “No Tax on Tips” label is a bit misleading, since the tip deduction does not eliminate all taxes on tip income.
- First, while the tip deduction will wipe out federal income taxes on tips for many people, it won’t do so for everyone. For instance, if your income is too high, the deduction can be whittled down to $0. Plus, some people don’t qualify for the deduction, and some tips don’t, either. So, tips are not completely exempt from federal income taxes, as the deduction’s nickname suggests.
- Second, tips are still subject to Social Security and Medicare taxes (jointly referred to as FICA taxes). These payroll taxes are paid by both employers and their employees (the employer withholds the employee’s portion from each paycheck)—each paying 7.65% of taxable wages, tips, and other compensation. Higher-income employees must also pay a 0.9% additional Medicare tax.
- Third, independent contractors also pay self-employment taxes on their tip income. This is basically equivalent to the combined total of both the employer’s and the employee’s portion of FICA taxes—so, 15.3%. But at least you can deduct 50% of the self-employment tax on your federal income tax return.
- Finally, you might have to pay state and/or income taxes on your tips. Whether these taxes apply depends on where you live. Check with your state’s tax agency to find out if your tips will be taxed at the state level.
Related: States That Tax Social Security Benefits
Is the Tip Deduction Permanent?
The tip deduction is a temporary tax break. As it stands right now, it’s only available for the 2025 to 2028 tax years.
However, the deduction could be extended or made permanent down the road. Whether that happens very well may depend on who controls Congress and the White House after the 2028 election—so, stay tuned!
Want to talk more about your financial goals or concerns? Our services include comprehensive financial planning, investment management, estate planning, taxes, and more! Schedule a call with Riley to discuss what you need, and what we can do for you.
Copyright © 2026 by Rocky Mengle. All rights reserved. Used with permission.
