The tips tax deduction, created by the One Big Beautiful Bill Act (Pub. L. 119-21, signed July 4, 2025), allows a federal income tax deduction on up to $25,000 of qualified tip income per year under IRC § 224. The deduction is available for tax years 2025 through 2028. It reduces federal income tax only. Social Security and Medicare taxes still apply to tip income in full. The deduction phases out starting at $150,000 MAGI for single filers and $300,000 for married filing jointly.
- Deduction cap: $25,000 of qualified tip income per tax year (IRC § 224)
- Applies to TY 2025, 2026, 2027, and 2028 only. No deduction after December 31, 2028.
- Above-the-line: available with the standard deduction or itemizing
- Phase-out: $100 reduction per $1,000 of MAGI above $150,000 (single) or $300,000 (MFJ)
- FICA and SECA are not reduced. Tips remain fully subject to payroll taxes.
- Married Filing Separately: disqualified entirely
- 68 IRS-approved occupations. Voluntary tips only. Service charges excluded.
- Claimed on Schedule 1-A with Form 1040
What Is the No Tax on Tips Deduction?
The One Big Beautiful Bill Act created IRC § 224, which allows eligible workers to deduct up to $25,000 of qualified tip income from federal taxable income. The law was signed on July 4, 2025 (Pub. L. 119-21) and applies to tax years beginning after December 31, 2024.
The phrase "no tax on tips" is the political name for this provision. The legal name is the qualified tip income deduction. The distinction matters because the deduction does not eliminate all tax on tips. It eliminates federal income tax on up to $25,000 of qualifying tip income. Payroll taxes are a separate obligation and remain unchanged.
The deduction is above the line, meaning it reduces your adjusted gross income. You do not need to itemize deductions to claim it. It is available to tipped employees and qualifying self-employed workers in the same way.
How the Deduction Is Calculated
The calculation has two components: determining your eligible tip amount, then applying the phase-out if your income exceeds the threshold.
Step 1: Eligible tip amount
Start with your total voluntary tip income for the tax year. The maximum deductible amount is $25,000. If you earned less than $25,000 in tips, you can only deduct what you actually received.
Self-employed workers face an additional cap. Your deduction cannot exceed your net income from the business where tips were earned. A self-employed rideshare driver who earned $18,000 in tips but had $10,000 in net income after expenses can deduct only $10,000.
Step 2: Phase-out reduction (if applicable)
If your Modified Adjusted Gross Income (MAGI) exceeds the threshold, the maximum deduction is reduced before you apply it.
Excess MAGI = max(0, MAGI − threshold)
Threshold: $150,000 (Single / HOH) · $300,000 (MFJ)
Full phase-out at: $400,000 (Single / HOH) · $550,000 (MFJ)
A single filer with $180,000 MAGI and $20,000 in tips calculates the phase-out as follows: $180,000 minus the $150,000 threshold equals $30,000 of excess MAGI. Divide by $1,000 to get 30 units. Multiply by $100 to get a $3,000 reduction. The maximum deductible amount drops from $25,000 to $22,000. Since actual tips are $20,000, the final deductible amount is $20,000. The phase-out has no practical impact in this case.
Phase-out applies to the cap, not directly to tip income. The phase-out reduces the $25,000 maximum. If your actual tip income is already below the reduced cap, the phase-out does not affect you at all.
Which Occupations Qualify
Tips must be received in an occupation that customarily and regularly received tips on or before December 31, 2024. The IRS published a list of 68 qualifying occupations.
Common qualifying occupations
- Food and beverage servers, bartenders, bussers, and baristas
- Hotel housekeeping staff, bellhops, and concierge workers
- Taxi, rideshare, and limousine drivers
- Salon stylists, barbers, nail technicians, and spa workers
- Casino dealers and gaming attendants
- Golf caddies
- Valet attendants and parking staff
- Digital content creators where tipping (e.g., platform tip features) was an established practice before December 31, 2024
- Delivery drivers and courier workers where tips are customarily received
SSTB exclusion
Workers in a Specified Service Trade or Business (SSTB) under IRC § 199A are excluded from the tip deduction. SSTBs include businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage.
This exclusion applies to self-employed workers and, notably, to employees whose employer operates an SSTB. Under IRC § 224, an employee is treated as working in an SSTB if their employer qualifies as one. A massage therapist employed at a health services practice may be excluded on this basis even if tips are voluntary and genuine.
If you are unsure whether your employer qualifies as an SSTB, verify before claiming the deduction. The IRS OBBBA provisions page provides the official occupation list and current guidance.
What Counts as a Qualified Tip
A qualified tip is a voluntary cash or charged payment from a customer, including shared tips distributed from a tip pool. The key word is voluntary.
Qualifies
- Cash tips handed directly to the worker
- Tips added to a credit or debit card payment
- Shared tips received from an employer-operated tip pool
- Tips suggested on a receipt (where the customer is free to change the amount or add nothing)
Does not qualify
- Mandatory service charges automatically added to a bill (e.g., "18% gratuity included for parties of 6 or more")
- Any amount the customer was required to pay and had no genuine freedom to modify
- Employer-set service fees that happen to be paid to staff
The IRS draws the line at customer choice. If the customer determines the amount freely, it is a tip. If the establishment sets the amount and the customer pays it, it is a service charge regardless of what it is called on the receipt.
FICA and SECA: What Still Applies
This is the most misunderstood part of the deduction. The OBBBA tip deduction reduces federal income tax. It does not touch payroll taxes.
FICA and SECA still apply in full to tip income. The deduction is a reduction in taxable income for federal income tax purposes only. IRC § 224 makes no change to employment tax obligations.
For W-2 employees
Tips remain subject to Social Security tax (6.2%) and Medicare tax (1.45%) as employee FICA. Your employer withholds the employee share and pays a matching employer share. Tips are reported on Form W-2 Box 7. Social Security tax applies only up to the wage base ($176,100 for TY 2025; $184,500 for TY 2026). Medicare has no wage base cap.
For self-employed workers
Self-employment tax (SECA) applies at 15.3% on 92.35% of net earnings up to the Social Security wage base, plus 2.9% Medicare above that. The tip deduction does not reduce the SE tax base. A self-employed rideshare driver who claims the tip deduction still owes full SECA on tip income.
State income taxes
Most states have not conformed to the federal tip income deduction as of early 2026. If your state has not enacted a matching provision, tip income remains fully taxable at the state level. States that conform to federal AGI changes may automatically conform depending on their conformity statutes. Verify your state's position before assuming any state tax savings.
| Tax Type | Reduced by Tip Deduction? | Rate (Employee) |
|---|---|---|
| Federal income tax | Yes, up to $25,000 excluded | 10%–37% (bracket-dependent) |
| Social Security (FICA) | No | 6.2% (up to wage base) |
| Medicare (FICA) | No | 1.45% (no cap) |
| Self-employment tax (SECA) | No | 15.3% on 92.35% of net |
| State income tax | Most states: No | Varies by state |
How to Claim the Deduction
Form and line
Claim the qualified tip income deduction on Schedule 1-A (Additional Deductions), filed with Form 1040. The IRS published Schedule 1-A in March 2026 for use with TY 2025 returns (IR-2026-28, March 2, 2026).
W-2 reporting for TY 2025 (Notice 2025-69)
The IRS issued Notice 2025-69 to provide transition relief for TY 2025. Because W-2 and 1099 forms were not updated in time for the new deduction, employers received penalty relief for failing to separately report qualifying tip income.
For TY 2025, employees can calculate their deductible tip amount using any reasonable method. This includes Form W-2 Box 7 (allocated tips), personal tip logs maintained during the year, paystubs showing tip income, or employer-provided tip reports.
W-2 reporting for TY 2026 and beyond
Notice 2025-69 relief expires after TY 2025. Beginning with TY 2026 W-2s, employers must use the updated W-2 reporting codes. Qualified tip income is reported using Code TP. Employers who fail to comply face penalties without the benefit of the 2025 transition relief.
Self-employed workers
Self-employed workers report tip income on Schedule C as part of gross receipts. The tip deduction is then claimed separately on Schedule 1-A. Self-employment tax (Schedule SE) is calculated on net earnings before the tip deduction is applied, since the deduction does not reduce the SE tax base.
Confirmed vs. Pending Guidance
IRC §224 is enacted law. Most of its rules are confirmed by statute. The key pending item is the final qualifying occupation list.
Who Benefits Most
Tips Deduction vs. Overtime Deduction
Both deductions use the same MAGI phase-out thresholds. The caps and eligibility rules differ.
Practitioner Insight
At LMN Tax Inc., the first question we receive from tipped workers this season is whether they need to file differently. The answer is no. The deduction is claimed on Schedule 1-A. Nothing changes about how tip income is initially reported on the W-2 or Schedule C. What changes is the deduction applied against that income on the 1040. The second most common issue is clients who work in more than one job: one tipped, one not. Only tips from the qualifying occupation count. Wages from a non-tipped side job cannot be excluded from MAGI for purposes of the phase-out calculation.
Real-World Scenario
Bartender, single filer, TY 2025:
- W-2 wages (base hourly pay): $14,000
- Tip income (Box 7 on W-2): $22,000
- Total gross income: $36,000
- MAGI: $36,000 (below $150,000 threshold; no phase-out)
- Qualified tip deduction: $22,000
- Adjusted gross income after deduction: $14,000
- Standard deduction (TY 2025, single): $15,000
- Taxable income: $0
- Federal income tax: $0
- FICA still owed on $22,000 in tips: $1,683 (employee share)
This bartender pays zero federal income tax. The $1,683 FICA obligation on tips is separate and unchanged. State income tax depends on the state of residence.
When the Deduction Does Not Apply
- Married Filing Separately: fully disqualified regardless of income or tip amount
- Income above full phase-out: $400,000 MAGI (single) or $550,000 (MFJ): deduction is zero
- SSTB workers: self-employed in healthcare, law, finance, consulting, or employees whose employer operates an SSTB
- Mandatory service charges: any amount the customer did not voluntarily control does not qualify
- Non-qualifying occupations: the occupation must appear on the IRS-published list of 68 and must have been a tipping-customary role before December 31, 2024
- Tax years 2029 and beyond: the deduction sunsets on December 31, 2028 unless Congress extends it
Frequently Asked Questions
- IRC § 224 — Qualified Tip Income Deduction (U.S. House, Office of the Law Revision Counsel)
- IRS.gov — What the No Tax on Tips Deduction Means for You (March 5, 2026)
- IRS News Release IR-2026-28 — Schedule 1-A Published for TY 2025 (March 2, 2026)
- IRS.gov — One Big Beautiful Bill Act Provisions
- IRS Tax Topic 751 — Social Security and Medicare Withholding Rates
- IRS Notice 2025-69 — Transition Relief for TY 2025 Tip and Overtime Reporting
Related OBBBA Tools and Guides
Next Step
If your occupation is on the IRS qualified list and your MAGI is below the phase-out threshold, claim the full deduction on Schedule 1-A for TY 2025.
If your MAGI is above $150,000 (single) or $300,000 (MFJ), calculate your reduced deductible amount before filing. Use the No Tax on Tips Calculator to determine the exact amount after phase-out.
If you are self-employed or your employer may operate an SSTB, verify eligibility before claiming. For professional review, contact LMN Tax Inc.
The tip deduction is one of six OBBBA provisions for TY 2025–2028. If you also have overtime pay, a new car loan, or children, other OBBBA deductions may apply to the same return. See the OBBBA Tax Changes Guide for a full list of provisions, eligibility rules, and how to stack multiple deductions on Schedule 1-A.