No Tax on Tips
For 2025 through 2028, workers in occupations that customarily receive tips can deduct up to $25,000 of qualified tips from federal taxable income. You do not need to itemize. For a server in the 22% bracket with $25,000 in tips, that is about $5,500 of federal income tax kept each year.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Employees in occupations on the Treasury's list of tipped occupations, such as restaurant servers, bartenders, and hair stylists.
- Self-employed workers in listed occupations, outside specified service trades.
- Workers whose MAGI is under $150,000 single or $300,000 joint, who get the full deduction.
- Business owners who employ tipped staff and need to report tips correctly.
Who it's not for
- Workers whose tips are mandatory service charges added to the bill. Those are not qualified tips.
- Married couples who file separately. Joint filing is required.
- Anyone expecting Social Security and Medicare savings. The deduction is for income tax only.
How it works
Qualified tips are cash or charged tips paid voluntarily by customers, in an occupation that customarily and regularly received tips before 2025. The Treasury publishes the list of occupations.
The deduction is capped at $25,000 per return. It phases out for MAGI above $150,000 single or $300,000 joint.
Tips must be reported to you on a W-2, Form 1099 or similar statement, or on Form 4137 for unreported tips you report yourself. You must include your Social Security number.
The deduction is taken whether or not you itemize, so you also keep the standard deduction. It reduces income tax only. Payroll taxes on tips still apply.
Self-employed people in specified service trades, such as health, law, accounting and performing arts, cannot use the deduction for tips from that business.
Illustrative example
Illustrative: a single bartender earns $40,000 in wages and $30,000 in reported credit-card tips, MAGI $70,000, in the 22% bracket.
- Qualified tips: $30,000.
- Deduction cap: $25,000. MAGI is under $150,000, so no phase-out.
- Deduction: $25,000.
- Federal income tax saved: $25,000 x 22% = $5,500.
- Standard deduction of $16,100 is still taken.
About $5,500 of federal income tax kept for the year.
The rules
| Rule | Citation |
|---|---|
| Deduction for qualified tips up to $25,000, for tax years 2025 through 2028. | IRC §224 |
| The deduction is allowed in computing taxable income whether or not you itemize. | IRC §63(b) |
| Tips remain wages for Social Security and Medicare tax. | IRC §3121(q) |
| Specified service trades are defined by reference to the qualified business income rules. | IRC §199A(d)(2) |
Watch-outs
- Unreported cash tips do not qualify unless you report them. Keep a daily tip log.
- Automatic gratuities and service charges set by the business are not voluntary tips.
- Higher earners near the phase-out should project MAGI before counting on the full $25,000.
- Employers must report qualified tips and occupation codes correctly. Errors flow to the employee's return.
What we do
For individuals, we confirm the occupation qualifies, compute the deduction and phase-out, and file it correctly. For restaurant, salon and hospitality owners, we set up payroll and tip reporting so W-2s carry the right figures, and check the employer FICA tip credit.
Questions
Can I claim this if I take the standard deduction?
Yes. The tips deduction is separate from and in addition to the standard deduction.
Does it reduce my payroll taxes?
No. Social Security and Medicare tax still apply to tips. The deduction reduces federal income tax only.
What happens after 2028?
The deduction is scheduled to expire after 2028 unless Congress extends it. Plan with that date in mind.