How the tips tax deduction works
For tax years 2025 through 2028, tipped workers can deduct qualified tips from their federal taxable income — up to $25,000 per year. The deduction was created by the One Big Beautiful Bill Act signed in July 2025 and applies whether or not you itemize.
Qualified tips are voluntary cash or charged tips received from customers, including amounts received through tip sharing. Two important limits: mandatory service charges your employer adds to a bill are wages, not tips — they never qualify. And your occupation must be on the official IRS list of occupations that customarily and regularly received tips on or before December 31, 2024 (servers, bartenders, hairdressers, drivers, delivery workers and many more).
Income limits and phase-out
The deduction starts phasing out above a modified adjusted gross income (MAGI) of $150,000 ($300,000 joint). It is reduced by $100 for each full $1,000 above the threshold — reaching zero at $400,000 ($550,000 joint).
Who qualifies
- Employees whose tips are reported on Form W-2 (box 7), a Form 1099, or self-reported on Form 4137.
- Self-employed workers (e.g. independent drivers, guides, stylists) — but the deduction cannot exceed the net income from the business in which the tips were earned.
- Workers in a Specified Service Trade or Business (SSTB under section 199A, e.g. law, accounting, consulting, financial services) are not eligible — this also applies to employees of an SSTB employer.
- You must include a valid Social Security number on your return, and married couples must file jointly — married filing separately is not eligible.
Your tips remain subject to Social Security and Medicare (FICA) taxes and any state income tax — the deduction only reduces your federal income tax. Keep reporting all tips to your employer as usual; for 2025 returns the IRS allows reasonable methods (e.g. W-2 box 7 or tip logs) to determine the amount, and from 2026 tips are reported separately on information returns.
Sources
IRS: What the "No Tax on Tips" deduction means for you · OBBBA deductions overview (FS-2025-03) · Guidance & examples (IR-2025-114 / Notice 2025-69) · List of qualifying occupations