What Is the No Tax on Tips Law? Everything Tipped Workers Need to Know

If you work for tips, you've probably heard the buzz: tips are no longer taxed. That's not quite the full story, but the reality is still very good news. Starting with the 2025 tax year, tipped workers can deduct up to $25,000 in qualified tips from their federal taxable income — and that could mean thousands of dollars back in your pocket every year.

Here's everything you need to know.

What Is the No Tax on Tips Law?

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, created a brand-new federal income tax deduction specifically for tipped workers. It's officially called the Qualified Tips Deduction, and it's claimed using a new IRS form called Schedule 1-A.

The deduction lets eligible workers subtract up to $25,000 in qualified tips from their taxable income each year. If you're a server in the 22% tax bracket earning $20,000 in tips, that's roughly $4,400 you don't owe to the IRS anymore.

You can calculate your exact savings here.

Who Qualifies?

The law covers 68+ occupations that customarily receive tips. The Treasury Department published a list of qualifying job codes (called TTOCs — Treasury Tipped Occupation Codes), and the list includes most of the jobs you'd expect:

Food & Beverage: Servers, bartenders, baristas, bussers, food runners, hosts, cocktail servers, barbacks, sommeliers, banquet servers
Personal Care: Hair stylists, barbers, nail techs, spa therapists, estheticians, makeup artists
Hospitality: Bellhops, doorpersons, concierges, housekeepers, room service attendants, valets
Transportation: Rideshare drivers (Uber/Lyft), taxi drivers, limo drivers, shuttle drivers, airport skycaps
Entertainment: DJs, musicians, tour guides, golf caddies, casino dealers, coat check attendants
Delivery: Food delivery drivers, grocery delivery drivers
Other: Tattoo artists, pet groomers, movers, florists

There's one important requirement: your occupation must have customarily received tips before January 1, 2025. This prevents new industries from reclassifying wages as "tips" to exploit the deduction.

Not sure if you qualify? Use our free eligibility checker to find out in seconds.

The $25,000 Cap

The deduction is capped at $25,000 per year. If you earn $30,000 in tips, you can deduct $25,000. If you earn $15,000 in tips, you deduct the full $15,000.

This is an above-the-line deduction, which means you get it whether you itemize or take the standard deduction. That's a big deal — most tipped workers take the standard deduction, and this stacks on top of it.

What Counts as Qualified Tips?

Not all money that feels like a "tip" qualifies. The law is specific:

Qualified (yes, these count):

Cash tips handed to you directly
Credit card and debit card tips
Tips received through tip-sharing or tip-pooling arrangements
Tips reported on your W-2

Not qualified (these do NOT count):

Auto-gratuities — those mandatory 18% or 20% charges added to large party bills
Mandatory service charges — even if they're distributed to staff, the IRS considers these wages, not tips
Tips received by excluded professions — lawyers, accountants, doctors, financial advisors, consultants, and brokers

The key distinction is voluntary vs. mandatory. If the customer chose to leave it, it's a tip. If it was automatically added, it's a service charge.

The Income Phaseout

Higher earners get a reduced deduction. Here's how it works:

| Filing Status | Phaseout Starts | Fully Phased Out | |---|---|---| | Single / Head of Household | $150,000 MAGI | ~$400,000 | | Married Filing Jointly | $300,000 MAGI | ~$550,000 |

For every $1,000 your Modified Adjusted Gross Income (MAGI) exceeds the threshold, your maximum deduction is reduced by $100. So a single filer earning $160,000 would have their deduction reduced by $1,000 (from $25,000 to $24,000).

Important: the phaseout is based on your total MAGI, not just your tip income. Wages, investment income, side gig earnings — it all counts toward the threshold.

Check your phaseout status with our calculator.

How to Claim the Deduction

You claim the Qualified Tips Deduction on Schedule 1-A, a new IRS form created specifically for this purpose. It's filed alongside your regular Form 1040.

The basic steps:

Add up your qualified tips for the year
Check your MAGI against the phaseout threshold
Enter the deduction amount on Schedule 1-A
The deduction flows through to your Form 1040, reducing your taxable income

If you use a tax preparer, just make sure they're aware of the deduction. If you file yourself, Untaxed can generate a Schedule 1-A-ready report for you.

What's Still Taxed

The "No Tax on Tips" name is catchy, but let's be precise about what's actually changing:

No longer taxed (the deduction):

Federal income tax on up to $25,000 in qualified tips

Still taxed:

Social Security tax (6.2% on tips, up to the wage base)
Medicare tax (1.45% on all tips, plus 0.9% additional Medicare tax on high earners)
State and local income taxes (varies — 9 states have no income tax, but the rest still tax tips)

So if you're in the 22% federal bracket, the deduction saves you 22 cents on every dollar of qualified tips. FICA taxes (Social Security + Medicare) still apply no matter what.

The 2025 Transition Year

If you're filing your 2025 taxes right now, there's a wrinkle: employers were not required to separately report qualified tips on W-2s for 2025. That means your W-2 might lump all tip income together without distinguishing between voluntary tips and service charges.

What to do:

Keep your own records. A daily tip log is your best friend. Write down date, shift, cash tips, and credit card tips.
Check your W-2 Box 7 — this shows Social Security tips, which is a starting point.
If you didn't keep records, use your best estimate based on pay stubs and bank deposits.

Starting in 2026, employers will be required to report qualified tips separately, making the process much easier.

It Expires After 2028

The Qualified Tips Deduction is temporary. It applies to tax years 2025 through 2028 only, unless Congress votes to extend it. That gives you four years of potential savings.

If you already filed your 2025 taxes without claiming the deduction, you can file an amended return (Form 1040-X) with Schedule 1-A to claim it retroactively.

The Bottom Line

For millions of tipped workers, this is real money. A bartender earning $25,000 in tips could save $5,500 per year at the 22% bracket. Over four years, that's $22,000.

Don't leave it on the table.