With the limitations detailed below, a deduction up to $25,000 is allowed for qualified tips paid to a taxpayer and reported either on Form W-2 or 1099-NEC. The deduction is allowed whether the taxpayer takes the standard deduction or itemizes deductions. The deduction is available for the 2025 through 2028 tax years.
This is a deduction from the total income used in the calculation of income tax, not from employee Social Security and Medicare taxes on Form W-2, or from self-employment taxes paid on Schedule SE by self-employed workers. The tip credit available to employers in the food or beverage business (restaurants & bars) is similarly unaffected.
- Qualified tips are:
- Paid voluntarily
- Not subject to negotiation
- In an amount determined by the payor
- Amounts received for performing services (as either a business owner or employee) in the fields of health, law, accounting, consulting, financial services, brokerage services, performing arts, athletics, and similar businesses (SSTB) ARE NOT qualified tips.
Special rules for 2025 only
- The SSTB (Specialized Services Trade or Business) limitation is waived. However, the job must be on the eligible occupations list.
- While encouraged, employers will not be penalized for not providing supplementary statements that detail:
- Tips segregated by job type
- The job code(s) for the tipped job(s)
- The individual taxpayer will have more options on the source of information to determine the allowable tip deduction.
Forms W-2, 1099-NEC and 1099-MISC are being revised for tax year 2026 to comply with the law.
- “Cash tips” include tips that are paid in cash or charged, including tips received under a tip-sharing arrangement.
- Received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024. Some jobs, such as restaurant server, bartender, and rideshare driver, clearly meet the criteria. The Department of Treasury has published proposed rules on occupations meeting this requirement.
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- The deduction begins to phase out at $150,000 MAGI ($300,000 for Married Filing Joint).
- Married taxpayers must file jointly to take the deduction
- At the time of this writing, it is unclear how this will work for self-employed workers without tips reported on 1099-NEC.
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For employees receiving Form W-2 from their employer, the amount subject to the deduction should be straightforward–the amount of tips is shown in Box 5 of Form W-2. For self-employed people claiming the deduction, there is no obvious reporting standard for 2025.
This is a “below the line deduction” meaning the deduction affects calculation of tax after limitations affected by AGI. It won’t help a taxpayer qualify for and/or increase the amount of other tax breaks with AGI-based eligibility requirements or phaseouts. This deduction, along with the new deductions for tax on overtime, the additional senior deduction, and new car loan interest will be calculated on the new Schedule 1-A.
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