Roughly 6 million people reported income from tips on federal income tax returns in the past — and you can bet they’ll jump at the chance to see a bigger refund by claiming a new deduction on tip income on 2025 federal returns.
We’re talking about waitstaff, food servers, fast food and counter workers, barbers and hairdressers.
And bakers, blackjack dealers, babysitters, bingo workers, cruise directors, clergy, cab drivers, lounge singers, disc jockeys at a club (not someone on a radio show), dancers, wedding photographers, personal trainers, locksmiths, bellhops, golf caddies, clowns, massage therapists, magicians, tattoo artists. And much more.
The list is a long one but so, too, is the list of reasons you might qualify — or not — when it comes to a new deduction of up to $25,000 for tip income. Here’s what you need to know:
You’ll need to fill out a form to get a tax break on tips
The tax break on tip income is not automatic. You’ve got more work to do at tax time to claim the temporary deduction for the 2025, 2026, 2027 and 2028 tax years.
A new, two-page form called Schedule 1-A must be completed when filing your 2025 federal income tax return to claim the new deduction for tip income.
You can claim the new deduction relating to tip income regardless of whether you take the standard deduction, as most people do, or itemize deductions on a Schedule A.
Schedule 1-A titled “Additional Deductions” must be filed to get a tax break tips, overtime pay, car loan interest for new cars with final assembly in the United States, and a new tax break for those 65 and older.
See the first page on Schedule 1-A under part two with the headline “no tax on tips.” It’s a misleading headline, and frankly, not terribly responsible. All tip income is not eligible for a tax deduction, and as a result, you can pay taxes on some tips.
A better label: “Tax deduction for qualified tip income.”
The 13 lines in the tips section ask you to enter and add information regarding tip income, as well as your modified adjusted gross income.
Income limitations apply. If you make too much money overall, you might receive a partial tax break or no tax break at all.
The deduction for tip income starts phasing out for single taxpayers with modified adjusted gross incomes over $150,000 and at above $300,000 for married couples filing a joint return.
The deduction phases out at a rate that boils down to $100 for each $1,000 over the threshold. The tax break on tip income completely phases out when one’s modified adjusted gross income is $400,000 for single filers and $550,000 for married couples filing a joint return.
Remember, if married, you’re looking at the modified adjusted gross income for the couple, not just the spouse who receives tip income.
If you’re a massage therapist who receives tips but married to a high-paid CEO, for example, you’re not likely to be able to deduct tip income.
Make sure your occupation qualifies for the tax break
The U.S. Treasury Department has a list of dozens of occupations that “customarily and regularly received tips” on or before Dec. 31, 2024, that will apply to the tip-related tax deduction that is part the One Big Beautiful Bill Act. Here’s a link to the list.
Box 14b on your W-2 form reports the “Treasury Tipped Occupation Codes.”
Tips do not qualify if you work certain occupations, including in the fields of “health, athletics and the performing arts,” according to the Treasury Department and the Internal Revenue Service.
Occupations that qualify for the tax break on tips as spelled out by Treasury also include bartenders, washroom attendants, elderly companions, party planners, pet groomers and more.
You might see information in Box 14b of the W-2. But employers are not required to report this information on W-2 forms for 2025. You may need to ask your employer or research whether your occupation would qualify on your own. Employers will have more reporting requirements relating to occupations on 2026 forms.
How to add up your tip income
Todd Tigges, managing director and partner for UHY, said many people who claim the tips deduction should refer to the dollar amount listed in Box 7 on the W-2 to spot the tips received during the year that are subject to Social Security and Medicare taxes.
Tigges said Box 7 isn’t new; it has been on the W-2 in the past to enable taxpayers to report the tips as income on their tax returns, as required.
“It was always includable in income. The question is: ‘Are we eligible for a deduction now this year?’ ” Tigges said.
Now, in many cases, not all, the amount in Box 7 on the W-2 can be a starting point for claiming the tax deduction. But it is not as simple as copying what’s in Box 7 and plopping it onto Schedule 1-A.
The maximum deduction for tip income is $25,000 — and that maximum applies whether you’re single or a married couple filing a joint return.
So, here’s the deal. If you spot $30,000 in on your W-2 in Box 7, you cannot claim $30,000 in tip income as a deduction, warns Scott Klein, a certified public accountant and senior manager of tax policy and advocacy at the American Institute of CPAs.
The same would be true if you had $15,000 in tip income and your spouse had $15,000 in tip income. The maximum deduction for tip income is $25,000 per return, whether you’re married or single.
You cannot claim the deduction if you’re married and filing separately. And you must have a Social Security number to claim the tip income deduction.
Typically, many who receive tip income, such as waitstaff at a restaurant, use Form 4070 during the year to report their tip income, including cash tips, to their employers. It is required that employees regularly report cash and charge tips totaling $20 or more in a month to their employer during the year.
The income that you’ve reported should show up in Box 7 of the W-2.
But Tigges said workers may want to review their 4070 forms and total up the dollar amounts reported. Then, compare that amount with the number on the W-2 in Box 7. If the total from the 4070 forms is larger, Tigges said, you may be able to use that amount to claim a deduction, depending on your situation.
Taxpayers who claim qualified tips that exceed the total tip income reported on the W-2 Box 7 also need more records and information to do so.
“The majority of individuals are just going to have their W-2,” Tigges said.
Yet other forms can come into play, such as if you’re self-employed.
The IRS notes that taxpayers may be able to claim a deduction for qualified tips paid to them in 2025 that are included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported directly by the taxpayer on Form 4137, which is used for calculating the Social Security and Medicare tax owed on tips you did not report to your employer.
Klein, of the American Institute of CPAs, warns that there isn’t a special box on the 1099 forms to indicate the tip income received in 2025. As a result, you’ll need supporting documentation, such as a separate tip log kept over the past year, to separate out your tip income from your regular pay for that job.
Keeping a separate tip log is important in 2026, as well, to back up the deduction if it’s claimed next year when filing a 2026 federal income tax return.
“The key to this deduction is proper documentation,” Klein said.
Independent contractors may have point-of-sale reports or logs that they have maintained during the year that include information about tip income, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
For 2025, Luscombe stressed, “employers are not required to provide ‘qualified tips’ on W-2, so employees will need to figure that out.”
Luscombe said it doesn’t hurt for an employee to ask whether the employer can provide a dollar amount for the qualified tips they received in 2025, even if the employer is not required by the IRS to do so for 2025 income. Next year, employers will need to provide more information to employees for tip income received in 2026.
Here’s another key point that Luscombe shares: Employees should not try to claim the deduction on any noncash tips, say if someone gives you theater tickets as a tip, or on nonvoluntary tips. These types of tips would continue to be taxable.
Know whether the tip is voluntary or mandatory
The IRS takes the position that a tip must be voluntary to be claimed as a deduction, not required by the employer or establishment, such as an automatic gratuity of 20% on a bill for parties of six or more people.
The IRS says the tip must be paid freely by the customer and given directly or indirectly to the worker to qualify for the new tax break.
If a guest tips above the required maximum, though, you could deduct that excess amount. Say the person paying the bill decides to leave a $30 tip, instead of just $20, you could deduct the extra $10 in that case, just not that $20 mandatory tip.
Tigges noted mandatory tips should be excluded and not claimed as a deduction on Schedule 1-A. In some cases, he said, an employer might list all tips in Box 7 on the W-2 for 2025 and then list the eligible discretionary amount of tips on Box 14 of the W-2.
Unfortunately, he said there isn’t a lot of uniformity on forms in 2025 because the tax rules were signed into law in the summer but are retroactive to the start of 2025.
“There just wasn’t enough time for the IRS to create those updated forms,” Tigges said. “You’re going to have a little bit of everything, I think, this year.”
Employers are helping as best they can, he said, but this year the person earning the paycheck has more of an administrative burden when it comes to correctly claiming the deduction.
Some workers treat tip income, of course, as a fuzzy area, an area where maybe they tell themselves they can get away without reporting all the cash received, even though that’s what’s required. Sometimes, it’s an honor system and some studies have indicated that an estimated 40% to 55% of tip income ends up not being reported on federal income tax returns when it should be reported.
“You are not going to be eligible for the deduction if you’re not reporting it as income in some form or manner,” Klein said.
And people will still owe federal payroll taxes on tips that are reported as income, Klein said, which means that many do not have a reason to claim bogus income for a bigger but bogus tax deduction on tips.
While the IRS has released guidance for employers and employees, Klein said, some confusion still remains for some individual situations, and some may want to work with tax professionals if they’re claiming this deduction.
Who won’t benefit from the tax break on tips?
More members of lower-income households work in jobs where tips are a regular part of the pay structure than members of middle- or high-income families. But many lower wage workers won’t benefit, according to experts.
“Almost any single taxpayer making less than $15,750 and any married couple making less than $31,500 in 2025 will pay nothing in federal income taxes already (due to taking the standard deduction), so an additional tax deduction, such as the tips deduction, will not benefit them because it does nothing to reduce their tax liability further,” according to report by the Bipartisan Policy Center.
Garrett Watson, director of policy analysis at the nonpartisan Tax Foundation, agreed the additional tipped deduction produces no extra benefit for taxpayers with income under the standard deduction or with other deductions that reduce their taxable income to zero.
“This new tip deduction will have limited or no benefit for lower earning tipped workers. That’s because the tax benefit is structured as a deduction, which requires taxable income to be beneficial,” Watson said.
Where might you trip up?
What if you really underreported your tip income in the past? Well, you might face some problems ahead, possibly.
If tips reported to the IRS for the deduction in 2025 are suddenly much higher than any tips reported in the past, Luscombe said, the IRS could decide to audit the last couple of open tax years to see whether you were underreporting tips on previous returns.
As a practical matter, he said, the IRS might decide not to pursue smaller matters. Even so, he said, the IRS at least might “send a computer-generated letter asking the taxpayer to explain conflicts with W-2, past returns, or other information.”
Another potential issue: “When the employer provides qualified tip information for 2026, the IRS may look back and compare it to what was claimed for 2025 by the taxpayer,” Luscombe said.
At some point, Luscombe said, you may have to explain what you claimed to the IRS and be prepared to have proof.
The best tax tip on tips: Don’t rush through the paperwork — and make sure you know the rules.
Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X @tompor.
This article originally appeared on Detroit Free Press: How to qualify for the new $25,000 tip deduction on 2025 taxes
Reporting by Susan Tompor, Detroit Free Press / Detroit Free Press
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