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Key takeaways

• If you earn tips at work, you may be able to deduct up to $25,000 of qualified tips on your federal income tax return.
• The tip deduction is gradually phased out – potentially to $0 – if your modified adjusted gross income exceeds $150,000 ($300,000 for married people filing a joint return).
• Despite the “no tax on tips” label, the tip deduction does not completely eliminate taxes on tips. Some people may still owe federal income tax on their tips, payroll taxes still apply to tips, and your state might also tax tips.
• The tip deduction is temporary – it only applies for the 2025 to 2028 tax years.

What is ‘no tax on tips’ in the new tax bill?

“No tax on tips” is the name given to a new tax deduction for tip income created by the “One Big Beautiful Bill” (also known as the Working Families Tax Cut), which was signed into law in July 2025. The tip deduction is available for the 2025 through 2028 tax years.

If you qualify, you can deduct up to $25,000 of certain tips received during the year. However, your deduction is gradually reduced – potentially to $0 – if your income is above a threshold amount.

While the deduction will eliminate federal income taxes on tip income for many people, it won’t erase the tax on tips for everyone. Plus, tips are still subject to payroll taxes and may also be taxed at the state or local level.

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Who qualifies for the tip deduction?

For the 2025 tax year, you can only deduct tips on your federal income tax return if you:

• receive the tips through a job that “customarily and regularly” received tips before 2025
• have a Social Security number that’s valid for employment and issued before the due date of your return (including extensions)
• file a joint return, if you’re married

In addition, “you can claim the tip deduction whether you itemize or claim the Standard Deduction on your return,” says Victoria Adams, an enrolled agent and TurboTax Expert based in Aberdeen, Wash.

Which jobs ‘customarily and regularly’ received tips before 2025?

Over 60 jobs have been designated as occupations that “customarily and regularly” received tips before 2025, including waiters, bartenders, hair stylists, caddies, rideshare drivers, and the like. The IRS has a complete list, which is broken down into eight categories, on its website (see the table below for a summary).

Make sure you check the list before claiming the deduction, says Adams, because “there are instances when tips are not customary.” For instance, she notes that tax preparers are not on the list, so she can’t claim the deduction after completing a return if “the client wants to add a tip on top of my invoice because they are happy with the service.”

Can I claim the tip deduction if I work for an SSTB?

For the 2025 tax year, you can claim the tip deduction if you work for a “specified service trade or business” (SSTB) and satisfy all the other requirements. But the deduction might not be available at some point in the future if you work for an SSTB – even if you hold a job that “customarily and regularly” received tips before 2025.

That’s because there’s a tax code provision that denies the tip deduction to anyone who works for an SSTB (including a self-employed person who works for their own SSTB). Various service businesses are treated as SSTBs, including (among others) those in the fields of:

• health
• law
• accounting
• performing arts
• consulting
• financial services

However, the SSTB provisions won’t take effect immediately. Noting that it’s not always easy to know what is or isn’t an SSTB, the IRS announced that it’s waiting until it can issue guidance on that question before applying the SSTB rule. So, at least for now, the tip deduction is available to SSTB workers who otherwise satisfy all the requirements.

What counts as a ‘qualified tip’ – and what doesn’t?

The tip deduction is only available for “qualified tips,” which generally includes cash tips that are:

• paid voluntarily, with no consequence if it’s not given
• not negotiated
• determined by the person giving the tip

Let’s take a closer look at some of these requirements. First, “cash” tips include tips paid by:

• check
• credit or debit card
• gift card
• tokens that can be exchanged for a fixed amount in cash (such as casino chips)
• any other form of electronic payment or mobile payment app (such as PayPal) based on cash

If you’re an employee (as opposed to an independent contractor), tips received through a tip-sharing arrangement, such as a tip pool, also count as cash tips – but tips in the form of property, services, and most digital assets don’t.

• TurboTax Tip: “In general, tips must meet the following conditions in order to be deductible. They must be voluntary, the customer must be free to choose the amount, the customer must decide who gets the tip, and the payment must be free from negotiation.” — Victoria Adams, EA, Aberdeen, Wash.

In addition, tips reported under an agreement established under the Tip Rate Determination Agreement program or Gaming Industry Tip Compliance Agreement program are considered qualified tips if the employee is otherwise eligible for the deduction and reports tips using the rates established under their agreement.

On the other hand, service charges, automatic gratuities, and other amounts automatically tacked on to a customer’s bill aren’t considered “voluntary.” As a result, they’re not considered qualified tips, unless the customer is expressly given the option to disregard or modify the amount added to a bill.

There are also a few other things that the IRS specifically says are not qualified tips, including any amount received for:

• illegal activity
• prostitution
• pornography

Plus, if you’re employed by or have an ownership interest in the person or business giving you a tip, then the amount you receive isn’t a qualified tip.

How do I determine the amount of qualified tips I received during the year?

For the 2025 tax year, employees can determine the amount of tips eligible for the tip deduction by using:

• the total amount of Social Security tips reported in Box 7 of their W-2 form(s)
• the total amount of tips reported to their employer(s) on all Forms 4070, or on any substitute form used to report monthly tips
• the total amount of cash tips reported in Box 14 of their W-2 form(s), or on a separate statement, if their employer voluntarily chooses to report tips in this manner
• any amount listed on Line 4 of a Form 4137 filed with their federal income tax return and included as income on that return 

Note that the amount in Box 7 of your W-2 form (first option above) is already included with other compensation from your employer in Box 1, so you don’t have to add tips reported in Box 7 to the amount in Box 1 when calculating your taxable income. However, Box 7 might not include all your cash tips if the combined total of the amounts in Boxes 3 and 7 equal $176,100 for 2025. In this case, you should use your monthly 4070 forms or other forms (second option) to figure your qualified tips.

Some employers may also provide information about an employee’s occupation, or other information related to the tip deduction, in Box 14 of a W-2 form. If that’s the case, the employee can rely on that information when claiming the tip deduction.

If you’re an independent contractor, you can calculate the amount of qualified tips for the 2025 tax year using earnings statements or other documentation – such as receipts, point-of-sale system reports, or daily tip logs – that report tips received during the year.

Things will change for the 2026 tax year. Starting with the 2026 tax year, only qualified tips that are separately reported on Form W-2, 1099-NEC, 1099-MISC, or 1099-K, or reported by an employee on Form 4137, will be deductible.

According to the IRS, Form W-2 and the 1099 forms will be updated for the 2026 tax year to provide separate reporting of cash tips and the employee or contractor’s “tip occupation code” (the codes can be found on the IRS’s list of jobs that “customarily and regularly” received tips before 2025).

The IRS is not updating these forms for the 2025 tax year, which is why the procedures described above are being used to determine the amount of deductible tips.

How do I calculate the tip deduction?

You can generally deduct up to $25,000 of qualified tips received during the year. However, there are several limitations that can reduce the amount of your deduction.

For example, if you’re married and filing a joint return, the $25,000 limit applies to the combined total of you and your spouse’s qualified tips – it’s not a per spouse limit. (And don’t forget that married couples must file jointly to claim the tip deduction.)

In addition, if you’re self-employed, the tip deduction can’t be greater than your net income – without regard to the deduction – from the business through which your tips were earned (net income is equal to gross income minus business expenses). If you own more than one business, the limitation applies to each business separately.

Your deduction – whether $25,000 or a smaller amount – will also be gradually phased out if your modified adjusted gross income (MAGI) is greater than $150,000 ($300,000 for married people filing a joint return). If that’s the case, your deduction is reduced by $100 for each $1,000 of MAGI over the applicable threshold amount (although it can’t drop below $0).

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For this purpose, MAGI is equal to the adjusted gross income reported on your Form 1040, plus any deduction or exemption claimed for:

• foreign earned income
• foreign housing costs
• income for residents of Guam, American Samoa, the Northern Mariana Islands, or Puerto Rico

Here’s an example of how to calculate the tip deduction: Suppose you’re married and both you and your spouse receive $15,000 of qualified tips in 2025 (for a combined total of $30,000). You also file a joint return, have a MAGI of $340,500, and satisfy all the tip deduction requirements for the 2025 tax year.

First, since your combined total of $30,000 in qualified tips is greater than the $25,000 maximum, your potential tip deduction is reduced from $30,000 to $25,000.

You then need to calculate an additional reduction, since your MAGI is $40,500 over the limit for joint filers ($340,500 – $300,000 = $40,500). To do this, first divide $40,500 by $1,000, and round down to the nearest whole number if the result is a fraction. The result of this is 40 (after rounding down from 40.5). Next, multiply that amount by $100 to determine the additional reduction, which is $4,000 ($100 x 40 = $4,000).

That means your tip deduction for 2025 is further reduced by $4,000, which drops it from the $25,000 maximum to $21,000 ($25,000 – $4,000 = $21,000).

How do I claim the tip deduction on my tax return?

Use Schedule 1-A, which is a new IRS tax form, to calculate and claim the tip deduction on your federal income tax return. The tip deduction is combined with other deductions claimed on Schedule 1-A, and the total amount is reported on Form 1040.

Schedule 1-A must be sent to the IRS along with the rest of your return.

Note that the tip deduction and all the other Schedule 1-A deductions are “below-the-line” deductions, since they’re reported on Form 1040 below the line for adjusted gross income (AGI). As a result, they won’t affect your AGI – but they will lower your taxable income, which reduces your overall tax liability.

A copy of Schedule 1-A can be found on the IRS website.

What taxes still apply even with ‘no tax on tips?’

Despite the “no tax on tips” label, the tip deduction does not eliminate all taxes on tips. You still have to pay both Social Security taxes and Medicare taxes (FICA taxes) on tips, and some people will still owe federal and/or state income taxes on the tips they receive.

If you’re an employee, you generally must report cash tips to your employer each month (no reporting is required if you received less than $20 in tips for a month). Your employer will then withhold your share of Social Security and Medicare taxes due from your paycheck and send it to the IRS (they will also pay the employer’s portion of these taxes).

If you receive $20 or more in tips during a month and don’t report them to your employer, use Form 4137 to calculate the Social Security and Medicare taxes you owe on those tips (if your employer treats you as an independent contractor, but you believe you’re an employee, use Form 8919 instead). You will have to pay the tax owed when you file your federal income tax return for the year.

If you’re self-employed, any tips you receive on the job are reported as income on Schedule C. That income is then used to calculate the self-employment tax, which is equal to both the employer’s and employee’s portion of Social Security and Medicare taxes and paid with your federal income tax return (but 50% of the self-employment tax is deductible from your income).

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As for federal income taxes on tips, don’t forget that the tip deduction is gradually reduced if your MAGI is greater than $150,000 ($300,000 for joint filers). Some workers and tips don’t qualify for the deduction, either. So, you could still owe federal income taxes on tips depending on your income, your job, how the tips are paid, and various other disqualifying factors.

Plus, regardless of whether you qualify for the tip deduction, your employer should typically withhold a certain amount from your paycheck to cover federal income taxes on any reported tips. However, the amount withheld for income taxes is subtracted from the total tax reported on your Form 1040 for the year. So, withheld income taxes for any deductible tips are eventually credited back to you – and could actually be returned to you in the form of a tax refund.

Finally, your state might not allow a tip deduction, which means you might owe state and/or local income taxes on the tips you earn. Check your state’s tax agency to see how tips are treated where you live.

How much can I save with the tip deduction?

“For some people, the tip deduction can save hundreds, if not thousands, in taxes,” says Adams. “For instance, if you’re in the 12% tax bracket and you make up to $25,000 in tips, you could save up to $3,000 in taxes.” 

However, as Adams points out, “the amount saved depends on your total income, your tax bracket, and the amount of documented, deductible tips.” That’s because these factors, and others, can trigger one of the tip deduction’s limits – which, in turn, can reduce your tax savings.

So, let’s take a look at a few examples to see how the various limits can alter the deduction’s impact on your federal income tax bill (in all cases assume the taxpayer qualifies for the deduction).

Example 1: No limits apply

Andrew is employed by a restaurant as a waiter. He is single, receives $18,000 in qualified tips, has a MAGI of $45,000, and is in the 12% tax bracket for the 2025 tax year. Since he isn’t affected by the $25,000 cap on qualified tips, and his MAGI is below the $150,000 phase-out threshold for single filers, all $18,000 of Andrew’s qualified tips are deductible. As a result, the tip deduction will cut his tax bill by $2,160 ($18,000 x 0.12 = $2,160).

Example 2: $25,000 limit applies

Becky is employed by a tavern as a bartender. She is single, receives $30,000 in qualified tips, has a MAGI of $45,000, and is in the 12% tax bracket for the 2025 tax year. Becky’s MAGI is below the $150,000 phase-out threshold for single filers, but her qualified tips are above the $25,000 cap. As a result, only $25,000 of Becky’s tips are deductible (the remaining $5,000 is not deductible). That means the tip deduction will reduce Becky’s tax liability by only $3,000 ($25,000 x 0.12 = $3,000), which is $600 less than the $3,600 in savings that would have been allowed if all $30,000 of her tips were deductible ($30,000 x 0.12 = $3,600).

Example 3: Partial phase-out applies

Nicholas is employed by a travel company as a tour guide. He is single, receives $18,000 in qualified tips, has a MAGI of $160,000, and is in the 24% tax bracket for the 2025 tax year. Nicholas isn’t affected by the $25,000 cap on qualified tips, so all $18,000 of his qualified tips are deductible. However, since his MAGI is $10,000 above the $150,000 phase-out threshold for single filers, Nicholas’s tip deduction is reduced by $1,000 – from $18,000 to $17,000. That means his tax liability will drop by $4,080 ($17,000 x 0.24 = $4,080), which is $240 less than the $4,320 in savings he would have received without the partial phase-out ($18,000 x 0.24 = $4,320).

Example 4: Self-employment net income limit applies

Harper is a self-employed comedian. She is single, has $15,000 of net self-employment income (gross income minus expenses), receives $18,000 in qualified tips from her work as a comedian, has a MAGI of $45,000, and is in the 12% tax bracket for the 2025 tax year. Harper isn’t affected by the $25,000 cap on qualified tips, and her MAGI is below the $150,000 phase-out threshold for single filers. However, the deduction for her tips from self-employment can’t be greater than her net income from that work. As a result, only $15,000 of Harper’s tips are deductible (the remaining $3,000 is not deductible). That means her tax bill is reduced by $1,800 ($15,000 x 0.12 = $1,800), which is $360 less than the $2,160 in savings that she would have seen if all $18,000 of her tips were deductible ($18,000 x 0.12 = $2,160).

And don’t forget that all the tips in the examples above will be subject to either FICA taxes or the self-employment tax. 

What should businesses do to prepare for the tip deduction?

Although businesses are encouraged to provide information that will help their workers and contractors claim the 2025 tip deduction, the IRS announced that basic tip tracking and reporting requirements for business owners did not change for the 2025 tax year. However, there will be changes for the 2026 tax year.

For instance, businesses will have to separately report cash tips and provide a “Treasury tipped occupation code” on revised W-2 and certain 1099 forms. The income tax withholding tables and W-4 form will also be updated to factor in the tip deduction (and other “One Big Beautiful Bill” changes).

If your workers receive tips, here are a few things you can do now to prepare for the upcoming changes:

• Identify “tipped occupation codes” for workers who receive tips.
• Make sure your payroll systems can capture all qualified tips, separate them from other forms of compensation, and accommodate new W-2 and 1099 forms (including new cash tip codes for Form W-2).
• Go over the monthly tip reporting requirements with your employees.
• Review your tipping policies, including for tip pools, to make sure they comply with both federal rules and any state requirements. 
• Encourage employees who receive tips to fill out a new W-4 form in 2026 so that their income tax withholding is accurate.
• Keep accurate and organized payroll records so that you have the information you need, when you need it.
• Educate yourself on the tip deduction, since your workers will likely come to you or your managers with questions (but avoid giving personalized “tax advice”).
• Stay up-to-date on the latest IRS rules, regulations, and guidance on the tip deduction (we’ll help you with that).

Will my state conform to the ‘no tax on tips’ deduction?

Just because you can deduct qualified tips on your federal income tax return doesn’t necessarily mean you can also deduct them on your state tax return. Whether your state adopts the federal tip deduction largely depends on the starting point for calculating state taxable income, how the state “conforms” to federal law, and whether the state has its own tax law for tip income. 

In most states, the calculation of state taxable income starts with an amount taken from your federal income tax return. If your state starts with federal adjusted gross income, which is the most common starting point, the tip deduction won’t automatically reduce your state taxable income. That’s because the tip deduction is a “below-the-line” deduction (meaning it’s reported on your federal return after your AGI is calculated), so it doesn’t affect your federal AGI.

On the other hand, if your state starts its taxable income calculation with federal taxable income, the tip deduction might automatically impact your state taxable income. That’s because your federal taxable income will be lower if you claim the tip deduction. But even if your state starts with federal taxable income, the tip deduction won’t affect your state taxable income if the state’s “conformity date” is before Jan. 1, 2025, which is when the deduction took effect.

A state’s conformity date dictates which federal tax laws it adopts. For instance, if a state’s conformity date is Jan. 1, 2025, the state follows the federal law in effect on that day. Any new federal laws effective after the conformity date aren’t incorporated into state law. That’s why states with a pre-2025 conformity date don’t automatically recognize the tip deduction for state tax purposes.

There are two basic types of conformity dates – rolling and static. A rolling conformity date automatically changes to the effective date of the most recent federal tax law amendments (it “rolls” forward to match the federal revisions). A static conformity date is a fixed date that doesn’t change when the federal tax code is modified. Typically, a static date can only be adjusted by passing a new state law.

Now, having said all that, states can get around their taxable income starting point or conformity date by passing legislation to create their own deduction for tip income or “decouple” from the federal tip deduction (that is, repeal adoption of that specific federal law). And, of course, if you live in a state that doesn’t have a personal income tax, none of your tips are taxed at the state level.

So, as you can see, there are a lot of different factors in determining whether your state conforms to the federal tip deduction. The best way to find out where your state stands is to contact the state tax agency where you live or consult with a qualified tax professional.

What could change next with the tip deduction?

We can expect changes to the “no tax on tips” deduction and how it’s administered over the coming months and years. Adjustments can come in a variety of ways, such as new forms, guidance, regulations, and the like. Some revisions are certain to follow, while others may or may not happen.

Here are a few tip deduction changes to watch out for in the future:

• Changes to Forms W-2, 1099-NEC, 1099-MISC, and 1099-K to allow for separate reporting of qualified tips and “tipped occupation codes” for the 2026 tax year.
• Penalties for failure to properly report qualified tips and “tipped occupation codes” on Forms W-2, 1099-NEC, 1099-MISC, and 1099-K for the 2026 tax year (the IRS waived the penalties for 2025).
• Updates to Form W-4 worksheets that allow employees to adjust the amount of federal income tax withheld from their paychecks to account for the tip deduction.
• Final regulations defining “qualified tips” and occupations that “customarily and regularly” received tips before 2025 (the IRS has issued proposed regulations).
• Extension of the tip deduction beyond the 2028 tax year, which would require legislation passed by Congress and signed by the president.
• States “decoupling” from the federal tip deduction or enacting their own tax breaks for tip income.

Don’t worry about falling behind, though. We’ll update this article as needed so that you always have the most recent information available.

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Frequently asked questions about the tip deduction

Q1: How does “no tax on tips” work?

“No tax on tips” refers to a federal income tax deduction for up to $25,000 of certain tips received during the year. The deduction is available for the 2025 through 2028 tax years, and it’s subject to various limitations and other rules. Discover more about federal income tax deductions.

Q2: Will tips be tax-free in 2025?

No. Despite the “no tax on tips” label, tips are treated as taxable income for federal income tax purposes. However, you may be able to deduct some or all of the tips you receive during the year by claiming the federal tip deduction. In addition, tips are still subject to federal payroll taxes, and you may owe state income taxes on your tips. Learn more about taxes on tips.

Q3: What is the “No Tax on Tips” bill?

The federal tip deduction (also known as “No Tax on Tips”) was enacted as part of the “One Big Beautiful Bill,” which was signed into law on July 4, 2025. The deduction is codified as Section 224 of the federal tax code. Read about other tax law changes in the “One Big Beautiful Bill.”

Q4: Do I have to pay tax on tips?

You must report the tips earned during the year as income on your federal tax return, but you may be able to claim a tax deduction for those tips. If you’re not eligible for the deduction, or any of your tips don’t qualify for the deduction, then you will owe federal income tax on at least a portion of your tips. In addition, employees must pay FICA taxes on their tips, while independent contractors owe self-employment taxes on tips. Find out more about FICA taxes and self-employment taxes.

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