Who Qualifies for No Tax on Tips, and How Much Is It Worth?

A server with $10,000 of reported tips, whose top dollars are taxed at 12%, cuts about $1,200 off her federal income tax under the new tips deduction. At 22%, the full $25,000 is worth $5,500. That’s the practical size of “no tax on tips”: a deduction of up to $25,000 of qualified tips per return for tax years 2025 through 2028, shrinking by $100 for every full $1,000 of modified adjusted gross income above $150,000, or $300,000 on a joint return.

It came out of the 2025 tax law Congress called the One Big Beautiful Bill Act, and the nickname oversells it. Social Security and Medicare still come out of reported tips. Plenty of people who get tipped don’t qualify, either, because the IRS ties the break to a specific list of jobs.

Which jobs count, and who can claim

Start with the job. Only tips earned in an occupation the IRS says customarily and regularly received tips on or before December 31, 2024 count. The IRS list of tipped occupations has 71 entries in eight groups, each with a three-digit Treasury Tipped Occupation Code. Bartenders are 101 and wait staff are 102. Cooks, dishwashers, hair stylists, tattoo artists, taxi and rideshare drivers, and delivery workers are on it too. When the final regulations came out in April 2026, visual artists, floral designers and gas pump attendants were added.

Then the person. The IRS page on tip recordkeeping and reporting sets out the rest: your Social Security number, valid for employment, has to be on the return, and if you’re married you have to file jointly. An ITIN doesn’t work. Married filing separately doesn’t work either, even if your spouse never earned a tip. You can claim it whether you itemize or take the standard deduction, because it’s figured on its own schedule.

Tips that don’t count

A qualified tip has to be voluntary. The customer decides the amount, it isn’t negotiated, and it’s paid in cash, by card, by check or through an app. Tips you get through a tip pool or tip sharing still count.

Automatic service charges are where a lot of servers will get caught. The IRS uses the example of an 18% charge added to every large-party check. When the restaurant passes that money to staff, it’s wages, and it doesn’t qualify unless the customer could have removed or changed the charge. Tips earned while doing something illegal are out as well. So is any tip that never shows up on a Form W-2, a Form 1099, or a Form 4137 you file yourself for unreported tips.

What the deduction is worth

It’s a deduction, so what you keep depends on your tax bracket. Every $1,000 deducted saves $120 if those dollars would have been taxed at 12%, and $220 at 22%. If the deduction pulls part of your income down into a lower bracket, the savings on that slice drop a little.

Dana and Marcus below are invented single filers, picked to show both ends of the range:

Dana waits tables. Her W-2 shows $12,000 in reported tips and her top bracket is 12%. Deducting all $12,000 saves her $1,440 in federal income tax.
Marcus tends bar at a busy hotel. He reports $32,000 in tips and sits in the 22% bracket. The cap stops him at $25,000, so he saves $5,500. The other $7,000 is taxed like any other pay, which at 22% is $1,540.

Dana’s $1,440 is about a month and a half of tips at $1,000 a month. That’s real money, though it’s a long way from the tips being tax free.

Table of federal income tax saved by the qualified tips deduction for a single filer: 5,000 dollars of tips saves 600 dollars at 12 percent or 1,100 at 22 percent, 10,000 saves 1,200 or 2,200, 15,000 saves 1,800 or 3,300, and 25,000 or more saves 3,000 or 5,500 because of the 25,000 dollar cap — Past $25,000 of tips, the savings stop growing.

The cap is $25,000 per return. A married couple filing jointly where both work for tips still shares one $25,000 limit.

The income phase-out, and a rounding rule on the form

Part II of the 2025 Schedule 1-A walks through the math. Take your MAGI, subtract $150,000 ($300,000 if married filing jointly), divide the excess by $1,000 and round down to a whole number, then multiply by $100. That’s how much comes off a deduction that’s already been capped at $25,000.

The rounding works in your favor. Put a single filer with $10,000 of tips and a MAGI of $168,500 through those lines and the excess is $18,500. That rounds down to 18, not 19, so the cut is $1,800 and the deduction is $8,200. A joint return with $320,000 of MAGI and $20,000 of tips loses $2,000 and keeps $18,000.

Because the reduction is 10% of the excess, a single filer with the full $25,000 of tips doesn’t lose the deduction until MAGI reaches $400,000. For joint filers that point is $550,000.

Four cards showing the tips deduction for a single filer with 25,000 dollars of qualified tips: 25,000 at 150,000 dollars of MAGI, 20,000 at 200,000, 10,000 at 300,000, and zero at 400,000 — The phase-out is gradual: $100 per full $1,000 over the threshold.

Social Security, Medicare and state tax still apply

The deduction only touches federal income tax. The IRS employer guide, Publication 15, says plainly that tips are still generally subject to both the employee and employer shares of Social Security and Medicare tax when they reach $20 or more in a month. Dana’s $12,000 still has 7.65% taken out for those two taxes, which comes to $918.

State income tax is a separate decision for each state. The federal deduction doesn’t carry over automatically, so check your state revenue department’s site for whether it has adopted a matching break. Publication 15 also notes that employers can use an updated Form W-4 so the deduction shows up as lower withholding during the year, if you’d rather not wait for a refund.

Claiming it on your 2025 return

For tax year 2025 you use Schedule 1-A, attached to Form 1040, 1040-SR or 1040-NR. Employees enter the tips from Form W-2, box 7 (Social Security tips) on line 4a, plus any tips reported on Form 4137 on line 4b. The finished deduction lands on line 13, and the schedule’s total goes to Form 1040, line 13b.

For 2025, W-2s and 1099s weren’t redesigned in time, so nothing on them says “qualified tips.” IRS Notice 2025-69 lets workers fill that gap. A server can use the box 7 figure. A bartender whose employer reported more tips than box 7 shows can use either amount, then add unreported tips from Form 4137. Keep your tip logs and pay stubs with your return. If you already filed for 2025 and skipped the deduction, or your job was added to the list in the final rules, Form 1040-X is how you go back and claim it.

New W-2 boxes for 2026

Starting with 2026 pay, employers report cash tips in box 12 with code TP and put your occupation code in a new box 14b. Under the IRS’s 2026 Form W-2 instructions, an employer has to enter 000 as one of the codes if any of your tips came from work that isn’t on the list. The IRS’s draft 2026 Schedule 1-A, which isn’t final yet, pulls the employee figure from box 12, code TP, and from new tip boxes on Forms 1099-NEC, 1099-MISC and 1099-K. Look at your W-2 when it arrives in early 2027, before you file. If box 14b shows 000 for work you believe is on the list, ask payroll why.

Self-employed and gig workers

If you’re self-employed in a listed occupation, say a rideshare driver or an independent hair stylist, you qualify too, with one extra limit. The deduction can’t be more than the net profit of the business that earned the tips. A driver with $4,000 in app tips but only $3,000 of profit after car expenses deducts $3,000. At 12% that’s $360. The deduction comes after Schedule C, so self-employment tax on that profit doesn’t change.

Self-employed people in a specified service trade or business under section 199A are generally shut out, and so are employees of such a business. Notice 2025-69 gave transition relief on that point for 2025. For 2025, if a 1099-K lumps tips in with fares, daily tip logs are what back up the number you claim.

Before you file

Find your job on the IRS occupation list and write down its three-digit code.
Add up your tips from W-2 box 7 for 2025 (box 12, code TP for 2026), any Form 4137, and the tip amounts on your 1099s.
Take out mandatory service charges and anything over $25,000.
Estimate your MAGI. If it’s above $150,000 ($300,000 joint), run Schedule 1-A lines 8 through 13.
Multiply what’s left by your bracket rate so you know what the refund change should look like, and amend 2025 with Form 1040-X if you missed it.