Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
The new tax law was signed on July 4, 2025. It includes a provision that allows people who are paid in tips to take a deduction of up to $25,000 if they meet certain requirements. The new law allows the deduction from 2025 until 2028. While the IRS has additional guidance yet to release, we’ll do our best to help you know what to expect from this new tax break.
What tips qualify
The new deduction is available for employees and individuals who work in professions that have customarily and regularly received tips before the end of 2024. The IRS will publish a list of qualifying occupations by early October 2025. We expect the following professions to be on that list (although there may be many others).
- Restaurant servers
- Salon and barber shop workers
- Delivery and taxi drivers
- Bartenders
- Doormen
- Valets
- Bell hops
- Cruise ship employees
- Gaming dealers
- Tour guides
- Tattoo artists
- Golf caddies
To qualify for the deduction, the following must apply:
- The tips must be voluntarily paid by customers with cash or through credit card charges or paid to employees through tip sharing.
- The employee or the self-employed individual cannot be receiving the tip for work in a specified service trade or business (SSTB) under the qualified business income deduction. Those include the following:
- Healthcare
- Law
- Accounting
- Actuarial sciences
- Performing arts
- Consulting
- Athletics
- Financial services
- Investing
- Any business where the principal asset is the skill and training of the employees or the owner
- The tips being deducted are less than $25,000; for self-employed individuals, the deduction is limited to the lesser of $25,000 or the net income of the self-employed business where the tips are being received.
- The modified adjusted gross income of most tax returns with the deduction is less than $150,000, or $300,000 for married joint returns. Because the deduction is phased out at a rate of $100 for every $1,000 that income exceeds the limits, all filers will completely lose the deduction at modified gross income of $400,000.
For example, a single waitress working full-time at the tipped income minimum wage of $2.13 per hour would earn about $4,500 for the year in non-tip income. If she makes an average of $100 a day in tips, she would earn about $26,000 in annual tip income. The taxable income in box 1 of her W-2 is $30,500, and this will likely still be her earned income for credits like the earned income credit and the additional child tax credit. However, her $25,000 tip deduction combined with the standard deduction—either $15,750 for single filers or $23,625 for head of household filers—will be greater than her gross income of $30,500, resulting in zero taxable income. This should lead to a full refund of any federal income tax that was withheld, along with all refundable credits for which she qualifies.
💡Note: The commonly used phrase for this new deduction, “no tax on tips,” refers specifically to federal income tax. Payroll taxes (such as Social Security and Medicare) and state and local income taxes may still apply to tip income.
How will this be reported on my W-2 or my 1099-NEC?
Payers and employers will file information returns to the IRS or the Social Security Administration that report the tips received and the occupation of the tip recipient. The full implementation of information reporting on Forms W-2 and 1099 for the new tips provision will likely not be complete until 2026.
Can I claim this deduction if I don’t itemize?
Yes. The deduction for qualified tips is available to taxpayers whether or not they itemize deductions.