Key Takeaways
Not all tips or workers qualify. Only workers in IRS-approved occupations who customarily received tips before 2025 and meet filing and SSN requirements can claim the deduction, and only certain types of cash tips are eligible.
The deduction is capped and income-limited. You can deduct up to $25,000 in qualified tips (total, not per person), but the amount may be reduced based on your income, filing status, or net self-employment income.
It lowers taxable income, not FICA taxes. The tip deduction reduces your federal income tax liability but does not eliminate Social Security or Medicare taxes, and state tax treatment depends on where you live.
Who is Eligible For No Tax on Tips?
Regardless of whether you itemize or take the standard deduction, you are eligible to deduct your tips if you:
- Have a Social Security number (SSN) that was issued before the due date of your tax return (this includes extensions), and it’s valid for employment in the United States, and
- Work in a position where you “customarily and regularly” received tips before 2025.
Those who file as single, head of household, or married filing jointly are also eligible. Those who file married filing separately are generally ineligible.
Which Jobs Qualify?
The government has identified over 60 jobs that qualify for tax-free tips. As you might expect, this includes maids, waitstaff, bartenders, and delivery drivers (such as Uber Eats), as well as a plethora of other positions. Below is a quick overview by category. You can see the full list of eligible jobs on IRS.gov.
- Beverage and Food Service (restaurant staff, bakers, and more)
- Entertainment and Events (dancers, musicians, casino staff, etc.)
- Hospitality and Guest Services (hotel employees)
- Home Services (electricians, plumbers, landscapers, and more)
- Personal Services (event planners, photographers, pet sitters, etc.)
- Personal Appearance and Wellness (massage therapists, hair stylists, and more)
- Recreation and Instruction (golf caddies, tour and travel guides, etc.)
- Transportation and Delivery (rideshare drivers, valets, and more)
Be sure to refer to the list on IRS.gov. If your position is not listed, you must pay taxes on any tips received during the year.
What Qualifies as a Tip?
If your job is one of those identified as eligible to take the new tip deduction, it’s important to note that not all tips may qualify. Generally, any cash tips received that were paid to you voluntarily are acceptable, as long as the person giving the tip determined the amount and it wasn’t negotiated.
Cash tips may include those made by:
- Currency
- Checks
- Credit cards
- Debit cards
- Gift cards
- Tokens (such as casino chips)
- Other electronic payment (Venmo, PayPal, etc.)
Any tips received through a tip-sharing arrangement are also acceptable.
What Doesn’t Count?
Any tips made in the form of property, services, or a digital asset (NFTs) do not qualify. Additionally, any service charges or gratuities that are automatically applied to a person’s bill cannot be included as a qualified tip unless the person has the option to remove or modify the amount.
The IRS also states that if you receive a tip from an employer or from a business in which you hold an ownership interest, it is not a qualified tip.
How Much Can I Claim?
The IRS allows you to deduct up to $25,000 of qualified tips received during the tax year, but some limitations may reduce the amount you can claim. First, it’s important to note that the $25,000 limit applies to the total amount, whether you’re single or married filing jointly. It is not per person.
Additionally, if you are self-employed, the amount you claim cannot exceed your net income. If you own multiple businesses, the limitation applies to each individually, not as a whole.
There are also income thresholds. If your modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 if filing jointly), it is gradually reduced by $100 for every $1,000 over the threshold.
How to Claim The “No Tips on Taxes” Deduction
First, you’ll need to determine the amount you can deduct on your tax return.
For The 2025 Tax Year
You can calculate the amount of tips eligible for the tip deduction using:
- The total Social Security tips reported in Box 7 of your W-2 form(s)
- The total tips reported to your employer(s) on all Forms 4070, or on any substitute form used to report monthly tips
- The total cash tips reported in Box 14 of your W-2 form(s), or on a separate statement, if your employer voluntarily reports tips this way
- Any amount shown on Line 4 of Form 4137 that was filed with your federal income tax return and included as income
Keep in mind that the amount reported in Box 7 of the W-2 is already included in Box 1 (wages, tips, and other compensation), so those tips should not be added again when calculating taxable income. However, Box 7 may not reflect all cash tips if the combined total of Boxes 3 and 7 reaches $176,100 for 2025. In that situation, you should use your monthly Forms 4070 or other tip-reporting records to determine your qualified tips.
Some employers may also include an employee’s occupation or other tip-deduction-related information in Box 14 of the W-2. If provided, you may rely on that information when claiming the deduction.
Independent contractors can determine their qualified tips for the 2025 tax year using earnings statements or other records, such as receipts, point-of-sale reports, or daily tip logs that document tips received during the year.
Where to Enter the Amount
Once you determined how much you received in cash tips, you need to use Schedule 1-A to claim the tip deduction on your return. This is a new form created for the 2025 tax year (and beyond) and designed to claim the new tax deductions under OBBBA, including the tip deduction. It is separate from the standard Schedule 1 and Schedule A.
The total of the deductions included on your Schedule 1-A (line 38) should be included on your Form 1040 (line 13b), as well. Keep in mind that the tip deduction, along with all other Schedule 1-A deductions, is a “below-the-line” deduction because it’s reported on Form 1040 after adjusted gross income (AGI) is calculated. As a result, it doesn’t change your AGI, but it does reduce your taxable income and overall tax liability.
When You File in 2027 (2026 Taxes)
It will be much easier to calculate the amount next year. The IRS plans to update the Form W-2 and 1099s to include separate reporting of cash tips, as well as a “tip occupation code,” so you won’t need to manually calculate the amount moving forward.
How Much Will I Actually Save on Taxes?
The amount you save on taxes really depends on how much you earn in qualified tips, as well as your total income and your tax bracket. For some taxpayers, it could be a few hundred dollars or a few thousand dollars.
For example, Lilly is a bartender and receives $20,000 in qualified tips. Her MAGI is $47,000, which is in the 12% tax bracket for 2025. Since her income is not over $150,000 and exceeds the amount she earned in tips, she can claim the full $20,000 as a single filer. As a result, her tax bill will be reduced by $2,400 ($20,000 x 0.12 = $2,400).
Mark, on the other hand, makes $11,000 a year with $3,000 in qualified tips. He can also claim the full amount, but he’s in the 10% tax bracket. As a result, his tax bill is only reduced by $300 ($3,000 x 0.10 = $300).
Final Thoughts
The new “no tax on tips” deduction can be a meaningful tax break for eligible workers, but it comes with specific rules and limitations that are easy to overlook. Although the deduction can reduce your federal income tax bill, it doesn’t eliminate FICA taxes and may not apply at the state level. Because eligibility depends on your job, income, and how your tips are reported, it’s important to keep accurate records and review your situation carefully before filing. If you’re unsure how the rules apply to you, a tax professional can help ensure you’re claiming the correct amount and staying compliant.