What "No Tax on Tips" really means
The No Tax on Tips provision, enacted in July 2025 as part of the One Big Beautiful Bill Act, adds a new federal deduction (Internal Revenue Code section 224) for qualified tips. For tax years 2025 through 2028, tipped workers can deduct up to $25,000 of tips from their federal taxable income. You don't need to itemize; the deduction goes on the new Schedule 1-A and stacks on top of the standard deduction.
It is not a blanket exemption. Your tips are still income. You still report them, your employer still withholds Social Security and Medicare on them, and in most states they're still subject to state income tax. What changes is that up to $25,000 of them no longer count toward your federal income tax bill.
What counts as a "qualified tip"
- Voluntary. The customer decides whether and how much to tip. Cash tips, credit-card tips, and tips you receive through a tip pool or tip-out all count. Mandatory service charges — the automatic 18% on a party of eight — are not tips and don't qualify.
- Reported. Only tips reported to your employer (they show up in your W-2 wages) or reported on Form 4137, or on your Schedule C if you're self-employed, count. Unreported cash is invisible to the deduction, and reporting it now has a real upside.
- Earned in a listed occupation. Treasury published a list of occupations that "customarily and regularly" received tips before 2025. It's broad: waiters, bartenders, bussers, hosts, cooks, dishwashers, food delivery and rideshare drivers, bellhops, valets, concierges, hotel housekeepers, hairstylists, barbers, nail technicians, estheticians, massage therapists, tattoo artists, golf caddies, DJs, musicians, dancers, home cleaners, movers, tour guides, and more. Jobs in "specified service trades" — law, health, accounting, consulting, finance, performing arts and athletics — are excluded.
The limits
The cap is $25,000 per return, whether you're single or married filing jointly. Above $150,000 of modified adjusted gross income ($300,000 joint), the deduction shrinks by $100 for every full $1,000 of income over the threshold — the IRS rounds the excess down. A single filer with $160,900 of MAGI loses $1,000 of deduction; at $400,000 the deduction is gone entirely. Very few tipped workers get anywhere near those numbers, which is the point.
If you're self-employed, there's one more limit: your tips deduction can't exceed the net profit of the business the tips came from. If your rideshare business shows $20,000 of net profit after mileage and expenses, your deduction is capped at $20,000 even if you took in $24,000 of tips.
Who qualifies
- W-2 employees and self-employed workers in a listed tipped occupation.
- You need a valid Social Security number (and your spouse does too on a joint return).
- Married couples must file jointly. Married filing separately is not eligible.
- No requirement to itemize.
How to claim it
Claim the deduction on Schedule 1-A (Form 1040), Part II. For 2026 and later, your W-2 will show total cash tips in Box 12 with code TP and a tipped-occupation code in Box 14b. For 2025, employers could report tips in Box 14 or on a separate statement, and the IRS allowed reasonable estimates from pay stubs and tip records if they didn't. Self-employed workers use their own records and Schedule C.
For 2025, your withholding didn't change, so the benefit shows up as a larger refund when you file in early 2026. For 2026, updated withholding may deliver some of it in your paychecks instead.
Worked examples
Tips and overtime together
Many tipped workers also earn overtime. The No Tax on Overtime deduction is separate, with its own $12,500 cap. You can claim both on the same Schedule 1-A.
Frequently asked questions
Are tips tax-free now?
For 2025–2028, up to $25,000 of qualified tips can be deducted from your federal taxable income. Tips still count for Social Security and Medicare and most state income taxes.
Do I still have to report my cash tips?
Yes. Reporting is what makes them "qualified." Unreported tips get no deduction and remain a compliance problem.
Do automatic gratuities and service charges count?
No. A mandatory charge the customer can't decline isn't a tip. Only voluntary tips qualify.
Do pooled or shared tips count?
Yes. Tips you receive through a tip pool or tip-out count for you; tips you pay out to others don't.
Is the cap $25,000 per person or per return?
Per return. A married couple filing jointly shares one $25,000 cap.
What's the W-2 code for tips?
Code TP in Box 12, starting with 2026 W-2s. Your occupation code appears in Box 14b.
I'm a cook or dishwasher who gets tip-outs. Do I qualify?
Cooks and food-prep workers are on the occupation list. If you receive reported tips through a pool, they count.
Does this reduce my Social Security or self-employment tax?
No. It's an income-tax deduction only.