No Tax On Tips Explained &#038; FAQs

If you rely on tips as part of your paycheck, you’ve likely heard about the new no tax on tips provision included in the One Big Beautiful Bill (OBBB), also called the Working Families Tax Cut Act. Starting in tax year 2025, tipped workers may qualify for a brand-new above-the-line tax deduction, which can potentially lower your taxable income by up to $25,000 per return.

But the rules are specific, and not every worker (or every tip) qualifies. Let’s break down how this new tax deduction works, including who qualifies and how to claim it on your 2025 tax return with TaxAct®.

Note: The OBBB is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used here, but they refer to the same set of tax changes.

Did the no tax on tips pass?

Yes, the no tax on tips deduction officially passed as part of the OBBB. Sometimes called the “Trump no tax on tips plan” because it was first proposed during his presidential campaign, the new tax cut lets workers in certain tipped occupations deduct a portion of their tip income from their taxable income.

Despite its name, no tax on tips does not mean tips are now completely tax-free. Here’s what you need to know:

You must still report tips to your employer and the IRS.

You’ll still pay Social Security and Medicare payroll taxes on tips (and any applicable state and local taxes).

What’s changing is the ability to deduct those tips (up to the $25,000 limit) when calculating your federal income tax.

So, while tips aren’t totally tax-free, the new law still means more tip money stays in your pocket.

What does no tax on tips mean?

“No tax on tips” refers to an above-the-line deduction for qualified tips. Above-the-line means it reduces your adjusted gross income (AGI) before you even choose between the standard deduction and itemizing. This means:

You can claim the no tax on tips deduction regardless of whether you itemize or take the standard deduction.

It applies whether tips are cash tips, debit card tips, or credit card tips — as long as they are reported correctly on your Form W-2, 1099 form, Form 4137, or another official tax form.

Unlike a tax credit (which reduces your tax bill dollar-for-dollar), this tax deduction lowers the income the IRS uses to calculate your federal income tax.

The deduction reduces your modified adjusted gross income (MAGI), which can lower your tax bracket, reduce tax withholding, and even help you qualify for other tax credits and deductions tied to income.

How does no tax on tips work?

There are some limitations to keep in mind when figuring out the deduction for no tax on tips. Here’s a breakdown of the rules:

No tax on tips ruleWhat it meansExampleDeduction amountYou can deduct up to $25,000 in qualified tips per tax return (not per spouse).A married couple filing jointly with $40,000 in tips between them can still only deduct up to $25,000 (instead of doubling the deduction to $50,000).Income limits (MAGI)Full deduction up to:

$150,000 MAGI for single filers$300,000 MAGI for joint filers

A single worker with $140,000 MAGI can deduct the full $25,000.

A married couple with $250,000 MAGI can deduct the full $25,000 as long as they file jointly.

PhaseoutDeduction shrinks by $100 for every $1,000 over the MAGI limit.A single worker with $160,000 MAGI ($10,000 over the MAGI limit) loses $1,000 of the deduction, giving them a max deduction of $24,000 (instead of $25,000).Filing statusMarried filing separately taxpayers are not eligible.A married worker in a tip occupation chooses to file separately from their spouse, disqualifying them from the deduction.Social Security number requiredYou must have a valid SSN to qualify for the no tax on tips deduction.A worker with only an individual taxpayer identification number (ITIN) cannot claim the deduction.Temporary tax breakDeduction applies to tax years 2025 to 2028 only.Tips earned in 2029 would not qualify unless Congress extends the rule.

Who qualifies for no tax on tips?

Not every job that occasionally receives tips will be eligible for the no tax on tips deduction. The IRS, through the Treasury Department, published a proposed list of occupations that “customarily and regularly receive tips.” If your job isn’t on that list, your tips won’t qualify.

Note: The IRS is accepting public comments on this proposed list. That means the final version could change in the future. If changeshappen, we’ll updatethis article to reflect the most accurate information available.For now, the proposedlist is the official guidance.

What jobs are eligible for no tax on tips?

The IRS has created a Treasury Tipped Occupation Code system to organize jobs into categories. Each category is assigned a three-digit code, and the proposed list groups the occupations into eight main categories:

CodeCategoryExamples100sBeverage and Food ServiceBartenders, servers, baristas200sEntertainment and EventsCasino dealers, ushers, coat check attendants300sHospitality and Guest ServicesBellhops, concierges, housekeeping staff400sHome ServicesHome maintenance workers (plumbers, electricians, etc.), landscapers, cleaners500sPersonal ServicesDog walkers, nannies and babysitters, private event photographers600sPersonal Appearance and WellnessHairdressers, nail technicians, massage therapists, tattoo artists700sRecreation and InstructionGolf caddies, tour guides, sports instructors800sTransportation and DeliveryValet attendants, taxi and rideshare drivers, baggage handlers

These codes will help both taxpayers and the IRS identify which jobs are considered tipped occupations for purposes of the no tax on tips deduction. If your job fits into one of these categories, and your tips are properly reported (via Form W-2, Form 4137, etc.), you should be eligible to claim the deduction.

Check out the Treasury Department’s guidance for the complete official list.

Tax Tip: If you’re part of a tip-sharing system or tip pool, the deduction still applies to the portion of tips properly allocated to you and reported on your Form W-2.

Exclusions: who does NOT qualify

Specified service trades or businesses (SSTBs): Professions like lawyers, doctors, accountants, and consultants are excluded, even if they occasionally receive tips. Check the IRS definition of an SSTB.

Illegal activity: Qualified tips do not include those connected to illegal services or sales (anything defined as a felony or misdemeanor under applicable laws).

Some industries are still a gray area. For example, marijuana sales may be legal under state law but remain illegal at the federal level. Because this deduction is tied to federal income tax, it’s unclear whether tips connected to marijuana-related businesses would be considered qualified tips.

Prostitution and pornography: Tips linked to these industries are also excluded. The IRS hasn’t yet defined exactly what applies under this category, but some online accounts on platforms like OnlyFans® may not qualify.

How to calculate your deduction for tip income

Beginning in tax year 2026, employers will be required to separately report qualified tips on Form W-2. However, the IRS is not requiring employers to do this for tax year 2025.

So, how do you calculate your deductible tips if your employer doesn’t do it for you? Here’s how to determine the amount yourself based on your reported tip income:

Check your Form W-2: Look at box 7 (Social Security tips) on your 2025 Form W-2. This box shows tips you reported to your employer.

Include any unreported tips you later report on Form 4137: If you had additional tips that weren’t reported to your employer but were later reported on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income), you can include those amounts in your qualified tips total.

Keep good records: Each month, employees are supposed to report their total tips to their employer on Form 4070, Employee’s Report of Tips to Employer (or a similar written statement).

For 2025, since employers won’t yet list qualified tips separately on Form W-2, you can use the total of all your Forms 4070 to help calculate your deductible tip income.

If you keep daily tip logs showing the date, amount, and source of each tip, those records can help verify your totals or fill in gaps if box 7 on your W-2 doesn’t reflect all of your tips.

Keeping both monthly Forms 4070 and a daily log gives you strong documentation if the IRS ever asks how you calculated your qualified tips.

If you’re self-employed or your tips come through third-party platforms (like rideshare apps or payment apps), it’s still important to keep a daily log showing the date, amount, and source of each tip, as your 1099 forms may not break out any tip income.

Add up your tips: Add together your reported tips (from Form W-2 or Form 1099) and any verified unreported tips from Form 4137 or your daily logs. This total represents your qualified tips (a.k.a. the amount you’ll use to calculate your no tax on tips deduction, up to the $25,000 limit).

Examples for tipped employees

The IRS also recently provided examples of how tipped employees can determine their deduction amount without a separate employer report. Here’s what this might look like in real life for different types of workers:

Restaurant servers and other tipped employees

If your W-2 lists your total tips in box 7 and you don’t have any unreported tips, you can simply use that amount to determine your deduction.

High-earners

If you don’t have unreported tips but notice box 7 on your W-2 seems lower than what you actually reported, your Social Security wages may have hit the annual limit ($176,100 for 2025). Once your total wages (Form W-2 boxes 3 + 7) reach that limit, your employer stops withholding Social Security tax, and any additional tips after that point won’t show up in box 7.

If this happens, you can use the total tips you reported to your employer each month on Forms 4070 (or similar) instead for a more accurate total of your qualified tips.

Workers with unreported tips on Form 4137

If you reported additional cash tips later using Form 4137, you can either:

Add those amounts to the box 7 total from your W-2 to calculate your deduction.

Add those amounts to the total tips you reported monthly to your employer on Forms 4070. This might be a more accurate reflection of your total tip income than box 7 on your W-2, depending on your situation (like if you are a high-earner discussed above).

Self-employed workers (like rideshare drivers or tour guides)

If you receive tips through third-party platforms or payment apps and those aren’t broken out on your 1099 form(s), you can rely on your own tip records. As long as your logs clearly show the date, amount, and customer for each tip, those amounts can count toward your qualified tips when calculating your deduction.

How to claim the no tax on tips deduction with TaxAct

Claiming the new deduction is simple with TaxAct. Here’s how to do it:

Enter your tip income from your Form W-2, Form 1099, or your personal logs.

Answer guided questions about your job and filing status.

TaxAct will automatically calculate your eligible tips deduction and apply it as an adjustment to income on Schedule 1A, which then flows into Form 1040.

Assuming you meet all the requirements, the deduction will reduce your taxable income, lowering your federal income tax owed or possibly resulting in a tax refund.

FAQs

When does no tax on tips start?

The deduction applies starting in tax year 2025 (the tax return you’ll file in early 2026). Tips earned in 2024 are still fully taxable under the old rules.

Will tips be tax-free in 2025?

Not entirely. You’ll still owe Social Security and Medicare taxes on tips, and you may owe state income tax as well. The new law applies to federal income tax, allowing you to deduct up to $25,000 in tips when calculating your taxable income for your federal tax return.

Do both cash and credit-card tips count for no tax on tips?

Yep! Cash tips, credit card tips, and debit card tips all qualify for this deduction, as long as you report them. If you don’t report your tips, not only do you lose the deduction, but you also risk IRS penalties for failing to disclose income.

Is automatic gratuity deductible?

No, only voluntary tips are considered qualified tip income for the purposes of the no tax on tips deduction.

For example, if a restaurant charges an automatic 18% gratuity for large groups, the wait staff will not be able to deduct the automatic gratuity because it was not a voluntary tip.

Is no tax on tips permanent or temporary?

The no tax on tips deduction is temporary. Unless Congress extends it, the provision will expire after tax year 2028.

What is the no tax on tips standard deduction rule?

This is an above-the-line deduction, meaning you can claim it even if you choose to take the standard deduction.

Are there income limits for the no tax on tips deduction?

Yes. To claim the full deduction, your MAGI must be $150,000 or less (if filing as single) or $300,000 or less (if married filing jointly). The deduction phases out by $100 for every $1,000 above those thresholds. Married filing separately returns do not qualify.

Will federal income tax withholding apply to my tips?

Yes. Employers must still withhold federal income tax from your wages and tips. The deduction will reduce your taxable income when you file your return, which may result in a tax refund or smaller balance due.

Do employers and workers still need to track and report tips?

Absolutely. Both employers and employees must continue to track, report, and document all tips. Employers will also need to separately report tips on Form W-2 beginning with tax year 2026. Form W-2 is not changing for tax year 2025, and the IRS is providing penalty relief for employers and payors who don’t separately report tip income (for tax year 2025 only). However, you can still find your reported tips in box 7 and your allocated tips in box 8.

Can I claim no tax on tips if I am self-employed?

Yes, you can! Self-employed workers (like rideshare drivers or delivery app workers) must report tip income on Schedule C and pay self-employment tax, which covers Social Security and Medicare tax. Those tips can still qualify for the no tax on tips deduction against your federal income tax up to the $25,000 cap as long as you meet the eligibility requirements.

Do noncash tips count for the no tax on tips deduction?

Nope. Noncash tips (like tickets, gift cards, event passes, or other items of value) are considered taxable income by the IRS, but they do not qualify for the new no tax on tips deduction. Only cash tips (including debit and credit card tips) that are properly reported can be deducted.

The bottom line

The new no tax on tips deduction is a huge change for tipped workers. While you’ll still pay Medicare and Social Security taxes on tips, you can now deduct up to $25,000 per tax return from your taxable income, helping you keep more of your hard-earned tip money.

If you’re in a tipped occupation, TaxAct can help you apply this new deduction when you file your tax return with us. That way, you can spend less time worrying about taxes and more time enjoying the extra cash you worked so hard to earn.

This article is for informational purposes only and not legal or financial advice.

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