No Tax on Tips: Who Can Deduct Up to $25,000 of Tips — and What Counts

For tax years 2025 through 2028, workers in tipped jobs can deduct up to $25,000 of their tips from federal taxable income. The provision — Internal Revenue Code §224, enacted in the One Big Beautiful Bill Act — is popularly called "no tax on tips." Like the companion overtime deduction, the nickname goes further than the law: only tips that meet a specific definition count, your occupation has to qualify, income limits apply, and tips remain fully subject to payroll taxes. This guide walks through each rule so you can tell what you can actually deduct.

What counts as a qualified tip

The deduction covers qualified tips: cash tips and charged tips (tips paid by card) that are given voluntarily by the customer. That includes:

• Cash handed to you directly or left for you;
• Tips added to a card payment;
• Your share of a tip pool or tip-splitting arrangement, as long as the underlying tips were voluntary;
• Tips you report to your employer, which appear on your W-2, and tips you report yourself on Form 4137 if you did not report them to your employer.

One common payment does not count: a mandatory service charge. If a restaurant adds an automatic charge for large parties and passes some of it to staff, that money is wages, not a tip, because the customer had no choice about paying it. Voluntariness is the dividing line — the customer must decide whether to pay and (for a charged tip) how much.

The occupation requirement

Not every worker who receives a payment called a "tip" can claim the deduction. Your tips must be received in an occupation that traditionally and customarily received tips on or before the end of 2024. The Treasury Department has published a proposed list of qualifying occupations, which clusters into familiar categories:

• Food and beverage service — servers, bartenders, baristas, hosts, bussers, cooks in tipped arrangements, and similar roles;
• Hospitality — hotel staff such as bell attendants, concierges, housekeepers in tipped settings, and valets;
• Personal services — barbers, hair stylists, nail and spa technicians, massage therapists, tattoo artists;
• Delivery — food and package delivery drivers and movers;
• Transportation — taxi and rideshare drivers, shuttle drivers, tour guides.

There is a second restriction aimed at professional firms. Tips received in a specified service trade or business — fields such as health, law, accounting, actuarial science, consulting, financial services, brokerage, and athletics or performing arts on the business side — do not qualify. In practice, this targets owners and employees of professional-service businesses and rarely affects restaurant, hotel, salon, or delivery workers.

Amount, phase-out, and filing rules

The phase-out mirrors the overtime deduction's thresholds. A joint filer with MAGI of $320,000 is $20,000 over the threshold, so the $25,000 cap is reduced by $2,000 (20 × $100) to $23,000. The benefit phases down gradually on the same $100-per-$1,000 schedule rather than vanishing at a single cliff.

Two filing rules are easy to trip over. First, married taxpayers must file a joint return — filing separately forfeits the deduction entirely. Second, you must include a valid Social Security number on the return; workers who file with an individual taxpayer identification number (ITIN) instead cannot claim it.

FICA on tips is unchanged

The deduction reduces federal income tax only. Tips are still wages for Social Security and Medicare purposes: the tips you report are subject to FICA exactly as before, and your employer still withholds payroll tax on reported tips. Many states also continue to tax tips in full, because state law does not automatically follow this federal deduction. Think of the benefit as a reduction in one specific tax — the federal income tax — not as tips becoming tax-free income in general.

What the deduction is worth

The value of any deduction equals the amount deducted multiplied by your marginal tax rate. For a worker who qualifies for the full $25,000:

• At a 22% marginal rate: $25,000 × 22% = about $5,500 of federal income tax saved.
• At a 12% marginal rate: $25,000 × 12% = about $3,000 saved.

Most tipped workers receive less than the maximum, so scale the math to your own totals: $8,000 of qualified tips at a 12% marginal rate is worth roughly $960. The deduction is claimed on the new Schedule 1-A, alongside the other new deductions from the same law, and it is available whether you take the standard deduction or itemize.

Records to keep

Good records make the deduction easy to claim and defend. Keep your employer's tip reports and your W-2, which reflects the tips you reported during the year. If you receive tips you did not report to your employer, you still owe FICA on them via Form 4137 — and reported tips are the ones that cleanly qualify. A simple daily log of cash tips, kept close to the time you receive them, is the standard way to support your numbers if the IRS ever asks.

Key takeaways

• You can deduct up to $25,000 of qualified tips for 2025–2028 — voluntary cash and charged tips, including pooled tips.
• Mandatory service charges are wages, not tips, and never qualify.
• Your occupation must traditionally and customarily receive tips, and tips from specified service trades or businesses are excluded.
• The deduction phases out above $150,000 / $300,000 of MAGI, requires an SSN, and married taxpayers must file jointly.
• FICA and most state taxes on tips are unchanged; the saving is roughly the deduction times your marginal rate.

Estimate your own saving with our No Tax on Tips Calculator. If part of your income is overtime rather than tips, the companion rules are covered in our guide to the overtime premium deduction.

Keep exploring

• How Paycheck Tax Is Calculated, Step by Step
• 2026 Federal Income Tax Brackets, Explained
• FICA Taxes Explained: Social Security and Medicare
• The 2026 Standard Deduction, Explained

Put the numbers to work: Paycheck Calculator · No Tax on Overtime Calculator · No Tax on Tips Calculator

Last updated: 2026-10-31. Tax parameters: 2026 (IRS Rev. Proc. 2025-32; SSA wage base; Tax Foundation state tables).