The “No Tax on Tips” Act, part of the One Big Beautiful Bill Act (OBBBA), allows for a new federal income tax deduction of up to $25,000 for “qualified tips” received in tax years 2025 through 2028. This applies to both W-2 employees and independent contractors who receive Form 1099-NEC.
Eligibility Requirements
- Qualifying Occupation: Tips must be received in an occupation that customarily and regularly received tips before December 31, 2024. The IRS has published a list of 68 qualifying occupations, including beerage and food service, entertainment and events, ervers, hospitality and guest services, bartenders, barbers, casino dealers.
- Voluntary the amount must be paid voluntarily by the customer, not a mandatory service charge automatically added to a bill unless the customer had the unrestricted right to modify or decline the charge.
- Not a “Specified Service Trade or Business” (SSTB): Tips from certain professional fields like health, law, accounting, or consulting do not qualify.
Deduction
- Income Limits: The maximum deduction is $25,000 per tax return, regardless of filing status. The deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $150,000 (single filers) or $300,000 (married filing jointly).
- Filing Status: Married taxpayers must file a joint return to claim this deduction. The deduction is not available for taxpayers who file Married Filing Separately (MFS).
- Reduces Taxable Income: This deduction reduces your federal taxable income, whether you take the standard deduction or itemize.
- FICA Taxes Still Apply: This deduction applies only to federal income tax. The tips are still subject to Social Security and Medicare (FICA) taxes.
Reporting Tips and Claiming the Deduction for 2025
- Reported: The tips must be included in total income reported on an official statement like a Form W-2, 1099-NEC, or 1099-K, or reported by the individual on Form 4137. For the 2025 tax year, the official IRS Form 1099-NEC will not have a specific box for “qualified tips” due to transitional guidance. Payors may not specifically account for “qualified tips” on the 2025 Form 1099-NEC.
- Keep Good Records Taxpayerys must include all tips as part of your gross income. They can rely on their own documentation (e.g., daily logs, tip sheets, pay statements, bank records) to determine your amount of qualified tips.
- Deduct Tips on Form 1040: The deduction is taken “above-the-line” on your personal income tax return (Form 1040), on a new Schedule 1-A. This means you can claim it even if you don’t itemize deductions.
- Self-Employed Limit: If you are self-employed, the tip deduction cannot exceed your net income from that business after all other expenses are deducted.