For millions of restaurant servers, bartenders, hair stylists, delivery drivers, and other service workers, tips are a large share of income. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, created a new federal income tax deduction for qualified tips. Often called “no tax on tips,” the provision does not make tips entirely tax-free, but it can significantly reduce federal income tax for eligible workers. This guide explains how the no tax on tips deduction works, who qualifies, what is still taxed, and how to claim it.
*This article is for general informational purposes and is not tax advice. Tax rules are complex and IRS guidance continues to develop; consult the IRS or a qualified tax professional about your situation.*
The basics of the deduction
Under the new law:
- Eligible workers can deduct up to $25,000 of qualified tips per year.
- The deduction applies for tax years 2025 through 2028. Unless Congress extends it, it expires after 2028.
- It is available whether you itemize or take the standard deduction. It is claimed separately, so you do not have to give up the standard deduction.
- The $25,000 limit applies per return, so a married couple filing jointly is limited to $25,000 combined.
- It is a deduction from income, not a credit, so it lowers taxable income. The dollar value depends on your tax bracket.
Who qualifies
Tipped occupations
The deduction applies to tips received in occupations that customarily and regularly received tips on or before December 31, 2024. The Treasury Department published a list of qualifying occupations, which includes many roles in food and beverage service, hospitality, personal care, entertainment, and transportation and delivery. Examples include servers, bartenders, baristas, hotel staff, hairstylists, nail technicians, and rideshare and delivery drivers. Check the official tipped occupations list on IRS.gov to confirm your job is covered.
Employees and self-employed workers
Both W-2 employees and self-employed workers can qualify. Self-employed individuals generally cannot claim the deduction for tips earned in a specified service trade or business (SSTB) as defined in the tax code, such as health, law, or performing arts, and an employee cannot claim it if the employer is in such a business under certain conditions. Self-employed workers also may only deduct tips to the extent they exceed related business expenses.
Social Security number and filing status
You must include a valid Social Security number on your return. If you are married, you generally must file jointly to claim the deduction.
What counts as qualified tips
Qualified tips must be:
- Paid voluntarily by the customer, with the amount determined by the customer and not subject to negotiation
- Received in cash or charge form, including tips added to card payments and tips distributed through tip-sharing arrangements
- Reported properly, included on a Form W-2, Form 1099, or other information return, or reported by the employee on Form 4137
Mandatory service charges, such as an automatic 18% gratuity for large parties, generally do not count as qualified tips because the customer does not choose the amount. Employers often treat them as regular wages.
The income phase-out
The deduction phases out for higher earners. It is reduced by $100 for every $1,000 of modified adjusted gross income (MAGI) above:
| Filing status | Phase-out begins |
|---|---|
| Single, head of household | $150,000 MAGI |
| Married filing jointly | $300,000 MAGI |
For example, a single filer with $160,000 of MAGI and $25,000 of qualified tips would see the maximum deduction reduced by $1,000, to $24,000. At high enough income, the deduction disappears entirely.
What is still taxed
This is where many people get confused. The no tax on tips deduction applies only to federal income tax. Tips remain subject to:
- Social Security and Medicare taxes (FICA). Employees still pay 7.65% on tip wages up to the Social Security wage base, and self-employed workers still owe self-employment tax.
- State and local income taxes, unless your state chooses to follow the federal deduction. States vary, so check your state’s rules.
- Reporting requirements. You must still report all tips to your employer and on your return.
Continuing to pay payroll taxes on tips also means tips still count toward your Social Security earnings record, which affects future retirement benefits.
How to claim the deduction
On your federal return
The deduction is claimed on Schedule 1-A, a new IRS form for the OBBBA deductions (tips, overtime, car loan interest, and the senior deduction), which flows to Form 1040. You will need your total qualified tips, which you can find on Form W-2, Form 1099, or your own records, and your MAGI to calculate the phase-out.
Reporting for 2025 and later years
For tax year 2025, the IRS provided transition relief because employers and payment platforms had not yet updated their systems. Employers were not required to separately report qualified tips and occupation codes on 2025 Forms W-2, and workers could use reasonable methods, such as pay stubs or employer statements, to determine qualified tips. For later years, the IRS has been updating Forms W-2 and 1099 to show qualified tips and occupation information. Check the current year’s form instructions.
Keep good records
- Keep a daily tip log or use your employer’s tip reporting system
- Save pay stubs showing reported tips
- Report tips of $20 or more per month to your employer, as required for employees
- Self-employed workers should track tips separately from other business income
Examples
Example 1: A server with moderate income
A single restaurant server earns $32,000 in wages and $20,000 in reported qualified tips, for MAGI under $150,000. The server can deduct all $20,000 of tips in addition to the standard deduction, reducing taxable income. Payroll taxes still apply to the tips.
Example 2: A married couple
A couple files jointly. One spouse is a bartender with $28,000 in qualified tips; the other has no tips. Their combined MAGI is $140,000. Because the cap is $25,000 per return, they can deduct $25,000, not $28,000.
Example 3: Tips above the phase-out
A single hairstylist has MAGI of $180,000 and $15,000 of qualified tips. The excess over $150,000 is $30,000, which reduces the maximum deduction by $3,000, to $22,000. Because their actual tips are $15,000, they can still deduct the full $15,000.
Planning tips for tipped workers
- Revisit your withholding. If the deduction lowers your tax, you may be over-withholding. You can update Form W-4 with your employer. Use the IRS Tax Withholding Estimator.
- Do not stop reporting tips. Unreported tips cannot be deducted and could lead to penalties.
- Check your state. Your state may tax tips fully even though the federal deduction applies.
- Watch the expiration date. The deduction is scheduled to end after 2028, so plan with that in mind.
How it interacts with other tax benefits
The tips deduction is subtracted after adjusted gross income (AGI) is calculated, so it lowers taxable income but does not lower your AGI. That matters because many other tax benefits, such as the Earned Income Tax Credit and various phase-outs, are based on AGI or earned income rather than taxable income, so those calculations are generally unaffected. Tax software and professional preparers will handle the interaction, but it is worth asking how the deduction affects your overall return.
Frequently Asked Questions
Are tips now completely tax-free?
No. The deduction applies to federal income tax only, up to $25,000 per return, with an income phase-out. Social Security and Medicare taxes and many state income taxes still apply.
Do I have to itemize to claim the no tax on tips deduction?
No. You can claim it in addition to the standard deduction. It is reported on Schedule 1-A.
Do automatic service charges count as tips?
Generally no. Mandatory service charges are not voluntary and are typically treated as wages, not qualified tips.
How long will the no tax on tips deduction last?
Under current law, it applies to tax years 2025 through 2028.
Can a married person filing separately claim it?
Generally no. Married taxpayers must file a joint return to claim the deduction.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
