No Tax on Tips: Federal Qualified Tips Deduction Guide (2025–2028)
⚠️Informational only — not legal or tax advice.
Tax professional consultation is available through the IRS Directory of Federal Tax Return Preparers at irs.gov/taxpros. The IRS may be contacted directly at 1-800-829-1040.
All information sourced from official .gov websites. Last verified: March 2026.
Table of Contents
- No Tax on Tips — Key Facts
- What Is the "No Tax on Tips" Deduction?
- Who Qualifies for the Tips Deduction?
- How Much Can Be Deducted?
- How to Claim — Step by Step
- State-by-State Impact — Do States Conform?
- Employer Obligations
- Frequently Asked Questions
- Tipped Employment Resources by State
- Official Government Sources
No Tax on Tips — Key Facts
| Federal Tip Income Deduction — Key Details (2025–2028) | |
|---|---|
| Detail | Information |
| Law | One Big Beautiful Bill Act (P.L. 119-21), Section 70201 |
| IRC Section | Section 224 (new) |
| Effective | Tax years 2025 through 2028 |
| What is deductible | Qualified voluntary tips in IRS-listed tipped occupations |
| Maximum deduction | $25,000 per return |
| Income phaseout begins | $150,000 MAGI (single) / $300,000 MAGI (joint) |
| Phaseout rate | $100 reduction per $1,000 of MAGI above threshold |
| Who qualifies | Employees and self-employed workers in Treasury-listed tipped occupations with valid SSN |
| Who does NOT qualify | Non-listed occupations; Married Filing Separately filers; mandatory service charge recipients |
| Eligible occupations | IRS.gov/TippedOccupations |
| IRS Form | Schedule 1-A (Form 1040), Part II |
| Still taxed | Social Security, Medicare (FICA), and state/local taxes (unless state conforms) |
| Claim with standard deduction? | Yes — available whether itemizing or claiming standard deduction |
What Is the "No Tax on Tips" Deduction?
The One Big Beautiful Bill Act (OBBBA), enacted as Public Law 119-21 and signed on July 4, 2025, established a new federal income tax deduction for qualified tips under Internal Revenue Code Section 224. The provision applies retroactively from January 1, 2025, and is scheduled to expire after the 2028 tax year.
Under the law, workers in occupations identified by the Treasury Department as customarily and regularly receiving tips may deduct up to $25,000 in qualified voluntary tips from their federal taxable income. According to the IRS, this deduction is available whether the taxpayer claims the standard deduction or itemizes.
Critical clarification: The “no tax on tips” designation describes a deduction from federal taxable income — it does not constitute a total tax exemption. According to IRS guidance (Notice 2025-69), the following taxes remain due on tip income regardless of the deduction:
- Social Security tax (6.2% employee share, on wages up to $176,100 for 2025)
- Medicare tax (1.45% employee share, no wage cap)
- State and local income taxes (unless the worker’s state has independently conformed to the federal deduction — see Section 6 below)
Tips must be reported to qualify. Workers must continue to report tips to their employers and on their tax returns. The deduction applies only to voluntary tips — mandatory service charges do not qualify.
According to Treasury and IRS estimates, more than 10 million tax returns report tip income annually. The deduction is expected to affect approximately 6 million workers who regularly report tipped wages.
Sources:
Who Qualifies for the Tips Deduction?
Occupation Requirement
According to IRS proposed regulations published September 22, 2025, workers must be employed in an occupation that “customarily and regularly received tips on or before December 31, 2024” as identified by the Treasury Department.
The IRS published a list of 68 qualifying occupations assigned Treasury Tipped Occupation Codes (TTOC). The official list is maintained at IRS.gov/TippedOccupations. The occupations are grouped across eight industry categories:
| Industry Categories — Examples of Qualifying Tipped Occupations | |
|---|---|
| Industry Category | Examples of Qualifying Occupations |
| Food & Beverage Service | Servers, bartenders, sommeliers, baristas, counter workers, bussers, barbacks, dishwashers, cooks, host/hostess, food delivery drivers |
| Entertainment & Events | Casino dealers, gaming floor workers, event staff |
| Hospitality | Hotel bellhops, housekeepers, valets, concierge, room service attendants, boat hoppers |
| Home Services | Plumbers, electricians, HVAC installers, landscapers (occupations added beyond traditional DOL tipped categories) |
| Personal Care | Nail technicians, estheticians, massage therapists, spa workers |
| Personal Appearance | Hairdressers, hairstylists, barbers, cosmetologists |
| Recreation | Golf caddies, fishing guides, water taxi operators |
| Transportation | Taxi drivers, rideshare drivers, airport shuttle drivers |
The complete list with TTOC codes is available at IRS.gov/TippedOccupations.
Who Does NOT Qualify
The following workers are ineligible for the tips deduction:
- Workers in occupations not on the IRS list — Including those in health professions, performing arts, athletics, and legal/financial services
- Specified Service Trade or Business (SSTB) workers — The OBBBA includes a provision to deny the deduction to workers employed by an SSTB under IRC Section 199A. However, per IRS Notice 2025-69, the IRS is providing transition relief on SSTB determinations for tax year 2025 — most workers in qualifying occupations may rely on the deduction during 2025 regardless of SSTB status
- Married Filing Separately filers — Not eligible
- Workers without valid Social Security number — Required
- Recipients of mandatory service charges only — Automatic gratuities or mandatory service charges distributed to employees do not constitute “qualified tips” even when passed through to workers
Employee vs. Self-Employed Workers
Both employees and self-employed workers in qualifying occupations may claim the tips deduction, subject to different documentation requirements:
- Employees: Qualified tips are reported on W-2 Box 7 (Social Security tips), Form 4070, or as documented through employer records
- Self-employed/independent contractors: Tips reported on Form 1099-NEC, Form 1099-MISC, Form 1099-K, or other documentation. According to IRS Notice 2025-69, the deduction for self-employed workers cannot exceed net income from that trade or business
| Qualified vs. Non-Qualified Tips | ||
|---|---|---|
| Type of Tip/Gratuity | Qualifies? | Basis |
| Voluntary cash tip from customer | ✅ Yes | Voluntary; qualifying occupation |
| Credit card tip paid voluntarily by customer | ✅ Yes | Voluntary cash equivalent |
| Gift card tip from customer | ✅ Yes | Cash equivalent per IRS regulations |
| Mobile payment tip (e.g., Venmo, Apple Pay) | ✅ Yes | Cash equivalent per IRS regulations |
| Tip received through tip pool from qualifying tips | ✅ Yes | Voluntary tips shared among workers |
| Mandatory 18% automatic service charge | ❌ No | Not voluntary |
| Mandatory service charge distributed to staff | ❌ No | Not voluntary regardless of distribution |
| Tips from non-qualifying occupation | ❌ No | Occupation not on IRS list |
| Tips from health professional services | ❌ No | Health professions not listed |
| Tips from performing arts work | ❌ No | Performing arts not listed |
| Digital assets (cryptocurrency) as tips | ❌ No | Excluded by IRS regulations |
| Unreported tips (Form 4137) | ✅ Yes | Per Notice 2025-69, reconciled unreported tips qualify |
How Much Can Be Deducted?
Maximum Deduction
According to Schedule 1-A instructions and IRS newsroom guidance:
- Per return maximum: $25,000 (not per spouse — this is a per-return cap)
- Minimum: The deduction cannot exceed actual qualified tips received
- Self-employed: The deduction is additionally limited to net income from the qualifying trade or business
Income Phaseout
The deduction phases out for higher-income filers:
- Phaseout begins at $150,000 MAGI (single) / $300,000 MAGI (joint)
- Reduction rate: $100 per $1,000 of MAGI above the threshold
- Phaseout complete: approximately $400,000 MAGI (single) / $550,000 MAGI (joint)
| Calculation Examples | ||||
|---|---|---|---|---|
| Scenario | Tips received | MAGI | Calculation | Deduction |
| Server, single | $18,000 | $45,000 | Below cap, below phaseout | $18,000 |
| Server, single | $30,000 | $45,000 | Capped at $25,000 max | $25,000 |
| Bartender, single | $20,000 | $160,000 | $160K − $150K = $10K over → 10 × $100 = $1,000 reduction | $19,000 |
| Hairstylist, married joint | $15,000 | $280,000 | $280K − $300K = below threshold | $15,000 |
| Casino dealer, married joint | $40,000 | $310,000 | Capped at $25,000; $10K over → 10 × $100 = $1,000 reduction | $24,000 |
| Server, single | $18,000 | $400,000 | Fully phased out at high income | $0 |
IRS illustration from Notice 2025-69: Ann is a restaurant server. Her 2025 Form W-2 shows $18,000 in Box 7 (Social Security tips). Deductible qualified tips: $18,000 (full amount, under cap, income below phaseout threshold).
Sources:
How to Claim — Step by Step
Tax Year 2025 (Transition Year)
The IRS designated 2025 as a transition year for tip reporting. According to IRS Notice 2025-62, employers are not required to separately report qualified tips on 2025 W-2 or 1099 forms and face no penalties for non-reporting.
Workers may determine their qualified tips for tax year 2025 using the following methods, per IRS Notice 2025-69:
Method A — Employer reports cash tips in W-2 Box 14: If the employer voluntarily reports qualified tips in Box 14 of Form W-2, the worker may use that reported amount.
Method B — Use W-2 Box 7 (Social Security Tips): Workers may use the amount shown in Box 7 of Form W-2 as the basis for qualified tips.
Method C — Use Forms 4070 (Tips Reported to Employer): Workers who reported tips to employers on monthly Forms 4070 may use those reported amounts.
Method D — Add unreported tips from Form 4137: Tips reported as unreported income on Form 4137, Line 4 may be added to the qualified tips calculation regardless of which primary method is used.
Self-employed workers: Tips received through third-party settlement organizations and reported on Form 1099-K may be used, with the worker identifying the tip portion from their own records.
Tax Year 2026 and Beyond
Beginning with the 2026 tax year, employers face new mandatory reporting requirements:
- W-2 Box 14a — Reports qualified tips
- W-2 Box 14b — Reports Treasury Tipped Occupation Code (TTOC) identifying the worker’s qualifying occupation
- Form 1099-NEC — Updated for independent contractors receiving qualified tips
- Updated Form W-4 — New withholding worksheet for anticipated tip deductions
Filing Steps — Schedule 1-A (Form 1040)
According to IRS Schedule 1-A instructions:
- Confirm occupation is on the IRS tipped occupations list at IRS.gov/TippedOccupations
- Determine MAGI (Form 1040 Line 11 plus applicable adjustments)
- Calculate total qualified tips using available documentation
- Complete Schedule 1-A, Part I (MAGI information)
- Complete Schedule 1-A, Part II (qualified tips section)
- Apply phaseout reduction if MAGI exceeds threshold
- Transfer the final deduction amount to Form 1040, Line 13b
- Attach Schedule 1-A to the return
The deduction reduces AGI before the standard or itemized deduction is applied, and is available to filers using either method.
Documentation to Retain
The IRS recommends retaining supporting documentation for a minimum of 3 years:
- W-2 Box 7 and Box 14 (for 2025) / Box 14a and 14b (for 2026+)
- Forms 4070 (monthly tip reports to employer)
- Form 4137 (unreported tips reconciliation)
- Daily tip logs or point-of-sale records
- Form 1099-K or 1099-NEC (for self-employed workers)
Sources:
State-by-State Impact — Do States Conform? {#state-impact-tips}
Federal vs. State Tax Treatment
The tips deduction established by the OBBBA applies exclusively to federal income taxes. State income taxes on tips remain due unless the worker’s state has independently conformed to the federal deduction.
States Linked to the Federal Tips Deduction
According to ITEP analysis (December 2025), eight states are currently linked to the tipped income deduction through their tax code conformity structure. These states stand to lose a combined $336 million in state tax revenue in 2026:
Colorado, Idaho, Iowa, Michigan, Montana, North Dakota, Oregon, South Carolina
Note: Colorado linked to the tips deduction but actively decoupled from the overtime deduction — the two deductions are tracked separately at the state level.
States That Have Actively Conformed
Michigan is the only state that affirmatively and actively chose to conform to both the tips and overtime deductions. The cost to Michigan from the tips deduction is estimated at $105 million in 2026.
State pages: Michigan Employment Law | Michigan Income Tax | Michigan Minimum Wage
States That Have Decoupled
- Maine — Governor Janet Mills issued instructions to the state’s tax assessor directing non-conformity with both the tips and overtime deductions. State pages: Maine Income Tax | Maine Minimum Wage
- District of Columbia — The DC Council passed legislation (B26-0457) confirming decoupling from both deductions. State pages: DC Income Tax | DC Minimum Wage
| State Conformity Summary Table — Tips Deduction | |||
|---|---|---|---|
| State | Conforms to Federal Tips Deduction? | Status | State Resources |
| Colorado | ✅ Yes (automatic) | Linked by default — did NOT decouple from tips | Income Tax | Minimum Wage |
| District of Columbia | ❌ No | Actively decoupled via B26-0457 | Income Tax | Minimum Wage |
| Idaho | ✅ Yes (automatic) | Linked by default via rolling conformity | Income Tax | Minimum Wage |
| Iowa | ✅ Yes (automatic) | Linked by default via rolling conformity | Income Tax | Minimum Wage |
| Maine | ❌ No | Governor order directing non-conformity | Income Tax | Minimum Wage |
| Michigan | ✅ Yes (active) | Affirmatively adopted by state legislature | Income Tax | Minimum Wage |
| Montana | ✅ Yes (automatic) | Linked by default via rolling conformity | Income Tax | Minimum Wage |
| North Dakota | ✅ Yes (automatic) | Linked by default via rolling conformity | Income Tax | Minimum Wage |
| Oregon | ✅ Yes (automatic) | Linked by default via rolling conformity | Income Tax | Minimum Wage |
| South Carolina | ✅ Yes (automatic) | Linked by default via rolling conformity | Income Tax | Minimum Wage |
| All other states | Verify with state agency | Varies — check state tax authority | Income Tax by State |
For workers in states without income taxes (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming), the federal deduction impacts federal taxes only.
Sources:
- ITEP — Linking to Tipped and Overtime Income Deductions Would Worsen State Shortfalls
- State legislature and governor’s office websites (.gov)
Employer Obligations
Tax Year 2025 — Transition Relief
According to IRS Notice 2025-62, employers are not required to separately report qualified tips on 2025 W-2 or 1099 forms. The IRS acknowledged the practical difficulty of retroactive reporting given the law’s July 4, 2025, enactment date and provided penalty relief.
Employers are encouraged (but not required) to assist employees by:
- Reporting qualified cash tips in W-2 Box 14 for 2025
- Providing employees with their applicable Treasury Tipped Occupation Code (TTOC) via separate statement
- Providing a separate statement approximating qualified tips for the full 2025 year
- Distinguishing qualified voluntary tips from mandatory service charges in any supplemental reporting
Employers must continue existing tip reporting and withholding obligations: FICA taxes (Social Security and Medicare) remain due on all reported tips regardless of the deduction.
Tax Year 2026 and Beyond — Mandatory Reporting
Beginning with tax year 2026, employers have new mandatory reporting requirements under the OBBBA:
- W-2 Box 14a — Reports the total amount of qualified tips for the year
- W-2 Box 14b — Reports the Treasury Tipped Occupation Code (TTOC), the three-digit code identifying the worker’s qualifying occupation category
- Form 1099-NEC — Updated to support separate tip reporting for independent contractors
- Updated Form W-4 — New worksheet to adjust withholding for anticipated tip deductions
Employers must separately identify voluntary qualified tips from mandatory service charges in payroll records. Mandatory service charges — including automatic gratuities — distributed to staff do not constitute qualified tips and must be tracked separately.
Employer obligations regarding tip reporting, minimum wage rules for tipped employees, and tip pooling remain governed by the Fair Labor Standards Act. The OBBBA deduction does not alter FLSA tip credit rules or tip pool regulations.
Sources:
- IRS — Notice 2025-62
- IRS — Treasury and IRS Issue Guidance Listing Tipped Occupations
- DOL — Tipped Employees Under the FLSA
Frequently Asked Questions — No Tax on Tips
Are tips completely tax-free now?
No. According to the IRS, the One Big Beautiful Bill Act created a federal income tax deduction for up to $25,000 in qualified voluntary tips for workers in IRS-listed occupations. Social Security and Medicare (FICA) taxes continue to apply to all reported tips. State and local income taxes also remain due unless the worker’s state has independently conformed to the federal deduction. Tips must still be reported to the employer and on the worker’s tax return to qualify. IRS — OBBBA Tax Deductions
Which occupations qualify for the tips deduction?
According to the IRS tipped occupations list, 68 occupations across eight industry categories qualify: food and beverage service (servers, bartenders, baristas, dishwashers, cooks, food delivery drivers), entertainment and events, hospitality (bellhops, housekeepers, valets), home services (plumbers, electricians, HVAC workers, landscapers), personal care, personal appearance (hairdressers, barbers, cosmetologists), recreation (caddies, guides), and transportation (taxi drivers, rideshare drivers). Workers in health professions, performing arts, and athletics are not on the list and do not qualify.
How much in tips can I deduct?
The maximum deduction is $25,000 per return. Workers who received less than $25,000 in qualified tips may deduct their actual qualified tip amount. The deduction phases out for filers with MAGI above $150,000 (single) or $300,000 (joint), at a rate of $100 per $1,000 above the threshold. Self-employed workers are additionally limited to net income from the qualifying trade or business. IRS — Schedule 1-A
Do mandatory service charges qualify?
No. According to IRS proposed regulations, qualified tips must be paid voluntarily by the customer. Automatic gratuities, mandatory service charges, and required fees — even when distributed to servers or other staff — do not constitute “qualified tips” for purposes of the deduction. Only amounts the customer elects to pay beyond the required bill qualify.
Can self-employed workers claim the tips deduction?
Yes, subject to additional limitations. According to IRS Notice 2025-69, self-employed workers and independent contractors in qualifying tipped occupations may claim the deduction. The deductible amount is limited to the lesser of (a) $25,000, (b) actual qualified tips received, or (c) net income from the qualifying trade or business. Tips reported on Form 1099-K from third-party settlement organizations may be used for 2025.
Do I still pay Social Security and Medicare taxes on tips?
Yes. FICA taxes — Social Security (6.2%) and Medicare (1.45%) — continue to apply to all reported tip income regardless of the income tax deduction. Employees must report tips to their employers monthly (using Form 4070) when total tips exceed $20 per month per employer. Employers withhold and remit FICA on all reported tips. IRS — Tip Income and Taxes
Does my state offer a no tax on tips deduction?
State conformity varies. As of early 2026, eight states are automatically linked to the federal tips deduction: Colorado, Idaho, Iowa, Michigan, Montana, North Dakota, Oregon, and South Carolina. Michigan is the only state to have actively and affirmatively adopted the deduction. Maine and the District of Columbia have actively decoupled from both the tips and overtime deductions. Workers should verify current status with their state’s department of revenue. View state-by-state details above
What if my employer didn’t report tips separately on my W-2?
For tax year 2025, employers are not required to separately report qualified tips on Form W-2 under the transition relief provided by IRS Notice 2025-62. Workers may calculate their qualified tips using W-2 Box 7 (Social Security tips), Forms 4070, Form 4137, or other documentation per IRS Notice 2025-69.
Can I claim both the tips and overtime deduction?
Yes. According to IRS Schedule 1-A instructions, both the qualified tips deduction (Part II) and the qualified overtime deduction (Part III) may be claimed on the same return, subject to each deduction’s individual eligibility requirements. Tips earned during overtime hours are governed by the tips deduction rules (Part II), not the overtime deduction rules (Part III). The two deductions are calculated independently. For more information, see: No Tax on Overtime: Federal Overtime Compensation Deduction (2025–2028)
What is Schedule 1-A?
Schedule 1-A is a new IRS form introduced for tax year 2025. According to the IRS, the form allows taxpayers to calculate and claim deductions for qualified tips (Part II), qualified overtime compensation (Part III), auto loan interest (Part IV), and the enhanced senior deduction. The total from Schedule 1-A is reported on Form 1040, Line 13b and reduces AGI.
What is the income limit for the tips deduction?
The deduction begins to phase out at $150,000 MAGI for single filers and $300,000 MAGI for joint filers. The phaseout reduces the deduction by $100 for each $1,000 of MAGI above the threshold. The deduction is eliminated at approximately $400,000 MAGI (single) and $550,000 MAGI (joint). IRS — Schedule 1-A Instructions
Is the tips deduction permanent?
No. Under the One Big Beautiful Bill Act, the qualified tips deduction applies to tax years 2025, 2026, 2027, and 2028 only. The provision is scheduled to expire after the 2028 tax year absent new legislation. Congress retains the authority to extend or make the provision permanent through future legislation. Public Law 119-21 — Congress.gov
Do unreported tips qualify for the deduction?
Yes, under specific conditions. According to IRS Notice 2025-69, tips that were not reported to the employer but are reconciled by the worker on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income), Line 4, may be included in the qualified tips calculation. Workers who did not report all tips during the year may do so at filing time using Form 4137 and include those amounts.
What is the difference between tips and service charges?
According to IRS proposed regulations, qualified tips are amounts the customer voluntarily elects to pay beyond the amount owed. Service charges are amounts imposed by the establishment — such as an automatic 18% gratuity for large parties — that the customer is required to pay. Service charges distributed to employees are wages, not tips, and do not qualify for the tips deduction even if labeled as “gratuity.”
What W-2 changes are coming for 2026 tip reporting?
Beginning with tax year 2026, according to draft IRS guidance: W-2 Box 14a will report the total qualified tips; W-2 Box 14b will report the Treasury Tipped Occupation Code (TTOC) identifying the worker’s eligible occupation. Form 1099-NEC will be updated for independent contractors. A new W-4 worksheet will allow workers to adjust withholding in anticipation of the tips deduction. These changes standardize what was informal in 2025.
Can a rideshare or food delivery driver claim the tips deduction?
According to the IRS tipped occupations list, rideshare drivers and food delivery drivers are included in the qualifying occupations under the Transportation category. Workers classified as independent contractors (not employees) in these occupations may claim the deduction as self-employed workers, limited to qualified tips received and net income from the trade or business.
What if I work in two jobs — one tipped and one non-tipped?
Workers holding multiple positions may only apply the tips deduction to tips received in qualifying tipped occupations listed by the IRS. Tips or compensation from non-qualifying occupations are not eligible. Workers must maintain separate records for each occupation to accurately determine qualified tips. IRS — Notice 2025-69
Tipped Employment Resources by State
The federal tips deduction interacts with state employment law, tipped minimum wage rules, and state income tax conformity. The following table provides access to state-specific resources for all 50 states and the District of Columbia.
Related Federal Resources
- No Tax on Overtime — Federal Overtime Compensation Deduction Guide (2025–2028)
- FLSA Overview — Federal Fair Labor Standards Act Guide
- All Employment Laws by State — Employment Law Hub
- Income Tax by State — Income Tax Hub
- Minimum Wage by State — Minimum Wage Hub
- Overtime Laws by State — Overtime Laws Hub