No Tax on Tips: the U.S. federal tip deduction, explained

What it is

The One, Big, Beautiful Bill Act (2025) created a U.S. federal income tax deduction for tips. For tax years 2025 through 2028, you can deduct up to $25,000 a year of qualified tips from your federal taxable income. You don't have to itemize — it works alongside the standard deduction. Details are on the IRS's OBBBA deductions page.

Two things it is not:

• It's not "tips are tax-free." It's a deduction against U.S. federal income tax, with a cap. Social Security and Medicare tax still come out of reported tips, same as always.
• It's not automatic. You claim it on Schedule 1-A of your Form 1040, and the tips have to show up on a W-2, a 1099, or Form 4137 first.

The deduction phases out once your modified adjusted gross income passes $150,000 ($300,000 for joint filers). You'll need a Social Security number on the return, and if you're married you must file jointly to claim it.

Who qualifies

Three tests, all U.S. federal:

• Your occupation is on the IRS list. The IRS publishes a list of occupations that customarily and regularly received tips on or before December 31, 2024 — wait staff, bartenders, bussers and bar backs, host staff, plus categories covering delivery, hospitality, personal services, and more. If you work a restaurant floor, you're almost certainly on it, but check your exact occupation.
• The tips are "qualified." Voluntary cash or charged tips from customers, or your share of a tip pool. Mandatory service charges the house adds to the bill aren't tips for this purpose.
• The tips were properly reported. On your W-2, on a 1099 if you're self-employed, or on Form 4137 for tips your employer didn't know about. Unreported cash never qualifies.

If you're self-employed, the deduction can't exceed your net income from the business the tips came from, and some specified service businesses are excluded — that's one for your preparer.

The record-keeping requirement

The deduction leans on rules that already existed: under U.S. federal law you report tips of $20 or more in a month to your employer by the 10th of the following month, and the IRS expects you to keep a daily tip record — date, cash tips, card tips, and what you paid out to bussers, bar, or runners. IRS Tax Topic 761 covers the reporting rules; Publication 531 describes the daily record itself.

The daily part matters. A number reconstructed in April from memory is exactly what the record is supposed to prevent. Written down the night you took it home, it's just a fact.

This is what TipBud is for, if you want an app for it: it logs each shift the night you work it — cash tips, card tips, and tip-outs, dated — and Export CSV… turns the whole year into one spreadsheet for your preparer. It works offline and the log stays on your phone. A paper notebook satisfies the IRS just as well; the only rule is that you actually keep it daily.

What to hand your preparer

• Your W-2 (and any 1099s) — employers report your tips and occupation on information returns, so your preparer will reconcile against these.
• Your daily tip record for the year — a CSV export or the notebook itself.
• Your occupation as it appears on the IRS tipped-occupations list, with its Treasury Tipped Occupation Code if you can find it.
• Tip-out amounts — what you passed to other workers, by shift, so only what you actually took home gets counted where it should be.

Then let them do their job. The deduction is claimed on Schedule 1-A of Form 1040; whether it helps you, and by how much, depends on your whole return.

Common questions

Is "no tax on tips" real?

Yes — as a U.S. federal income tax deduction, not a blanket exemption. Up to $25,000 a year of qualified tips for 2025–2028, whether or not you itemize, phasing out above $150,000 of modified adjusted gross income ($300,000 filing jointly).

How exactly does no tax on tips work?

No tax on tips is a U.S. federal income tax deduction: for tax years 2025 through 2028, workers in tipped occupations can deduct up to $25,000 a year of reported tips from taxable income. It is claimed on Schedule 1-A of the tax return, phases out above $150,000 of income, and leaves Social Security and Medicare taxes in place.

Do I still pay Social Security and Medicare tax on my tips?

Yes. The deduction reduces U.S. federal income tax only. Your employer still withholds Social Security and Medicare tax on reported tips, the same as before.

Do cash tips count?

Yes — cash, card, and tip-share tips can all qualify, but only if they're properly reported: on your W-2, a 1099, or Form 4137. That's why the daily record and the $20-a-month reporting rule matter — tips that were never reported can't be deducted.

What are the cons of no tax on tips?

"No tax on tips" has real limits: it reduces federal income tax only, is capped, phases out at higher incomes, and is temporary. Tips remain fully subject to Social Security and Medicare tax, and mandatory service charges never qualify, so a shift toward auto-gratuities can shrink what you may deduct.

• Payroll tax still due — the 7.65% Social Security and Medicare share comes out of every reported tip dollar.
• Capped and phased out — $25,000 a year at most, shrinking above $150,000 of modified AGI ($300,000 joint).
• Temporary — it expires after the 2028 tax year unless Congress extends it.
• Service charges excluded — mandatory auto-gratuities the house adds are not qualified tips.

What does "no tax on tips" mean for bartenders?

Bartenders are on the IRS list of tipped occupations, so their reported cash and card tips — including tip-pool and tip-out shares received — count as qualified tips. A bartender can deduct up to $25,000 a year of those tips from federal taxable income for 2025 through 2028; payroll and state taxes still apply.

What records do I need?

A daily tip record (date, cash tips, card tips, tip-outs), your W-2 or 1099s, and your occupation from the IRS list. Publication 531 describes the record; Schedule 1-A of Form 1040 is where the deduction gets claimed.