No Tax on Tips: How to Deduct Up to $25K of Your Income

Underreporting of cash tips was once a loosely-kept secret in service industries. Now, workers can accurately report their tips without paying federal income tax.

Some tipped workers are now eligible to claim a “no tax on tips” deduction: a new benefit that could provide savings for millions of Americans this tax season.

Bartenders, baristas and many other tipped employees can deduct up to $25,000 of tip income on their federal tax returns. The deduction phases out for single filers earning over $150,000 (or $300,000 for joint filers). It is reduced by $100 for every $1,000 of modified adjusted income, or MAGI, over those marks.

Underreporting of cash tips was once a loosely-kept secret in service industries. Now, workers can accurately report their tips without paying federal income tax.

The “no tax on tips” deduction is projected to provide an average benefit of $1,400 for eligible workers, according to the nonpartisan Economic Policy Institute.

Here’s everything you need to know.

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What occupations qualify for the ‘no tax on tips’ deduction?

The qualifying job categories include food and beverage industry workers, casino dealers, musicians, dancers, housecleaners, hairdressers and babysitters, among others.

The law applies to occupations that “customarily and regularly” received tips before 2025, when the One Big Beautiful Bill Act was signed. In September, the government published a list of 68 qualifying jobs spanning eight categories.

In November, the IRS announced that a relaxed approach to defining tip income would be in effect for the 2025 tax year (which impacts the taxes you file this spring). Under these temporary rules, taxpayers receiving tips who work in a “specified service trade or business,” like a health or law field, can claim the deduction.

The full list of roles that qualify for the “no tax on tips” deduction can be found here.

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How to claim the ‘no tax on tips’ deduction

Most tipped workers will see their savings from the deduction when they file their 2025 taxes.

Because many beneficiaries did not adjust their withholdings after the law was signed in July, the entire benefit for last year is coming their way in the 2026 tax season. Tipped workers will receive larger tax refunds, and some will owe smaller tax bills.

Eligible employees will need to complete a Schedule 1-A form, which is used for deductions under the new tax law, and attach it to their returns.

Many workers will be able to find their tip earnings in Box 7 of their W-2s. They can also check Forms 4070 and 4137, Box 14 of their W-2s, or reports from their employers, according to TurboTax. Independent contractors will likely use receipts, logs or point-of-sale reports.

A valid Social Security number is required, and couples must file jointly, if married, to claim the benefit.

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What exactly is a ‘qualified tip’?

According to the IRS, “‘qualified tips’ are voluntary cash or charged tips received from customers or through tip sharing.” Cash, credit and electronic tips may count as “qualified tips.”

Tips must be paid voluntarily for the deduction to apply, meaning that mandatory service charges do not qualify.

Businesses were encouraged, but not required, to share tip documentation with employees for the 2025 tax year. Next year, businesses will be subject to additional reporting requirements for employees’ cash tips, according to TurboTax.

Why tips are now tax-deductible

Lawmakers and Trump administration officials said the “no tax on tips” policy supports hardworking Americans in tipped occupations, including people living paycheck to paycheck. Its backers have described it as tax relief to address cost-of-living increases.

In a recent podcast appearance, Treasury Secretary Scott Bessent said Americans will receive “gigantic” tax refunds in 2026, citing the tip policy and other new deductions as the reason why.

In place from 2025 to 2028, the deduction has fine print and limitations. Over a third of tipped workers do not earn enough to owe federal income tax, as shown in a 2024 Yale Budget Lab report. Policy organizations such as the Tax Foundation have also questioned why tips are now deductible, but other blue-collar workers did not receive a proportional tax break from the 2025 law.

Lastly, keep in mind that tipped workers remain on the hook for payroll taxes — and may still owe state income tax on tips.

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