The short answer
"No tax on tips" is the popular name for a new federal income tax deduction. For 2025 through 2028, employees and self-employed people who receive qualified tips in an occupation on the IRS list of tipped occupations may deduct up to $25,000 a year. The deduction shrinks when modified adjusted gross income (MAGI) is over $150,000 ($300,000 on a joint return).
Your tips are not tax-free. They are still included in income and are still subject to Social Security and Medicare taxes. The deduction lowers the income subject to federal income tax.
Who qualifies
- You (or your spouse, on a joint return) received qualified tips during the year, as an employee or from self-employment.
- The tips were received in an occupation that customarily and regularly received tips on or before December 31, 2024, as listed by Treasury and the IRS.
- The person who received the tips has a Social Security number valid for employment, issued before the due date of the return (including extensions).
- If you are married, you file a joint return. Married filing separately cannot claim it.
- You can take the standard deduction or itemize — either way works.
Which occupations count
Treasury and the IRS issued final regulations in April 2026 listing more than 70 occupations, each with a Treasury Tipped Occupation Code (TTOC). The list is grouped into eight categories: beverage and food service; entertainment and events; hospitality and guest services; home services; personal services; personal appearance and wellness; recreation and instruction; and transportation and delivery. Examples include bartenders, wait staff, hotel housekeepers, hairstylists and barbers, manicurists, tour guides, parking and valet attendants, and taxi and rideshare drivers. Check the IRS list for your exact occupation.
Tips received while working for an employer in a specified service trade or business (as defined for the qualified business income deduction), or while self-employed in one, are not qualified tips. Under transition relief in Notice 2025-69, until final regulations on this point take effect, the IRS treats a worker in an occupation on the tipped-occupation list as not receiving tips in such a business. Tips received for a service that is a felony or misdemeanor under applicable law also do not qualify.
What counts as a qualified tip
| Generally qualifies | Generally does not qualify |
|---|---|
| Tips paid voluntarily by customers | Automatic gratuities and mandatory service charges the customer cannot change |
| Tips paid in cash, by check, credit or debit card, gift card, or a payment app | Non-cash items such as event tickets, meals, or services |
| Your share of a tip pool or tip-sharing arrangement | Amounts negotiated in advance as part of the price |
| Tips reported on Form W-2, Form 1099, another statement, or by you on Form 4137 | Tips earned in an occupation that is not on the IRS list |
A charge added to the bill can still be a qualified tip if the customer is expressly given the option to remove or change it without consequence.
The limit and the income phaseout
| Rule | Amount |
|---|---|
| Maximum deduction | $25,000 per return (combined on a joint return) |
| Self-employed limit | Not more than the net income of the business where the tips were earned |
| Phaseout starts | MAGI over $150,000 (single, head of household, qualifying surviving spouse) or $300,000 (married filing jointly) |
| How it phases out | The deduction drops by $100 for each full $1,000 of MAGI over the threshold |
| Years | 2025 through 2028 |
Examples (illustrative, tax year 2025)
Mia, a single server, earned $46,000 in 2025, including $12,000 of qualified tips she reported to her employer. Her MAGI is under $150,000, so she can deduct the full $12,000 on Schedule 1-A. She still owes Social Security and Medicare tax on those tips.
Daniel, a single bartender, has $30,000 of qualified tips and MAGI of $170,000. His deduction starts at the $25,000 maximum. His MAGI is $20,000 over $150,000, so the deduction is reduced by 20 × $100 = $2,000. He can deduct $23,000.
An automatic gratuity: a restaurant adds an 18% charge to every party of six or more, and the customer has no express option to change it. Even if the restaurant shares it with the servers, the IRS instructions say it is not a qualified tip.
2025 vs. 2026: how you find the amount
| Tax year | What to expect |
|---|---|
| 2025 | Forms W-2, 1099-NEC, 1099-MISC, and 1099-K were not updated to show qualified tips separately. The Schedule 1-A instructions and Notice 2025-69 explain how to determine the amount, for example from tips you reported to your employer or on Form 4137. Keep the records you used. |
| 2026 | Employers report cash tips in Form W-2, box 12, code TP, and the Treasury Tipped Occupation Code in box 14b. The deduction rules and limits continue; check the 2026 Schedule 1-A instructions when the IRS publishes them. |
Your employer still withholds taxes on reported tips. If you expect a large deduction, you can account for it on Form W-4 using the Step 4(b) Deductions Worksheet — see why you may owe at tax time.
Common misconceptions
- "All tips are tax-free now." Tips remain taxable income and subject to Social Security and Medicare taxes; the deduction is limited and phases out.
- "Any worker who gets tips qualifies." Only tips in a listed occupation count, and not tips in a specified service trade or business.
- "Service charges count." Mandatory charges the customer cannot change are not qualified tips.
- "Each spouse gets $25,000." The $25,000 limit is per return, combined on a joint return.
- "I don't need to report my tips to get the deduction." Tips must be reported — on Form W-2, Form 1099, another statement, or by you on Form 4137.
State income tax rules can differ from federal law. Do not assume your state allows this deduction.