No Tax On Tips | When It Starts, Income Limitations and More

January 16, 2026 by Karen Thomas-Brandt, EA

Have you ever worked at a restaurant, salon, or any other establishment where people give tips? If so, there’s a new tax rule you should know about! Starting in 2025, some workers may be eligible for a significant tax break on their federal income taxes for the tips they earn. Here’s what’s changing, who qualifies, and how you can make the most of it.
 

What’s the Big Deal?

Congress passed a law called the One Big Beautiful Bill Act (OBBBA), and one of its coolest features is the “No Tax on Tips” deduction. But don’t let the name fool you—tips aren’t totally tax-free. Instead, you can deduct up to $25,000 of your tip income from your taxable income. That means you could pay less in federal income tax, but you will still have to pay Social Security and Medicare taxes on all of your tips.
 

Who Can Use This Deduction?

Not everyone who gets tips can use this rule. Here’s what you need to know:
 

• You must work in a job where tips are common. The IRS will publish a list of jobs that “customarily and regularly” get tips. Think servers, barbers, nail techs, and more. 
• Your tips must be voluntary. Only tips that customers choose to give count. Mandatory service charges or automatic gratuities don’t qualify. 
• You need to report your tips correctly. If you receive cash tips, you are required to report them to your employer. If you get non-cash tips or forget to report cash tips, you must report them directly to the IRS. 
• You must have a work-eligible Social Security number. Your social security card should not say “NOT VALID FOR EMPLOYMENT.” 
• Income limits apply. If you make more than $150,000 a year (or $300,000 for married couples filing jointly), your deduction starts to shrink. If you make $400,000 or more ($550,000 for joint filers), you can’t use the deduction at all. 
• You must file a joint return with your spouse. If you are married, you cannot receive this deduction if you file Married Filing Separate (MFS). 

How Does the Deduction Work?

Let’s break it down with an example: 

Suppose you’re a single taxpayer working as a server and earn $175,000 per year. The deduction starts to shrink once you pass $150,000. For every $1,000 over $150,000, your deduction drops by $100.
 

• $175,000 (your income) - $150,000 (limit) = $25,000 over the limit 
• $25,000 ÷ $1,000 = 25 
• 25 × $100 = $2,500 reduction 

So, your maximum deduction would be $25,000 (the regular maximum deduction allowed), minus $2,500, which leaves you with $22,500 you can deduct from your taxable income.
 

What Counts as “Qualified Tips”?

• Cash tips from customers 
• Charged tips (like tips on a credit card) 
• Electronically paid tips 
• Tips from tip-sharing arrangements 

However, mandatory service charges don’t count, nor do tips from certain specified service trades or businesses, such as law, health, and consulting.
 

How Do You Report Your Tips?

Here’s a step-by-step guide:
 

1. Keep a daily record of all tips. The IRS has a form, Form 4070A, for this purpose, but you can use any method that works for you. 
2. Report cash tips to your employer. If you get $20 or more in cash tips in a month, tell your boss by the 10th of the next month. 
3. Get your Form W-2. Your employer should include your reported tips on your annual wage statement. 
4. Report unreported tips to the IRS. If you didn’t tell your employer about some tips, use Form 4137 to report them and pay Social Security and Medicare taxes. 
5. File your tax return. There will be a new form (Schedule A) to claim your deduction on your 2025 tax return. A draft of the form can be found here: 2025 Schedule 1-A (Form 1040) draft. Ensure your Social Security number is included on your return.. Ensure your Social Security number is included on your return. 

How Long Does This Last?

The “No Tax on Tips” deduction starts with the 2025 tax year and lasts through 2028. So, if you’re working in a tip-based job, you can use this rule for four years.
 

Final Tips (Pun Intended!)

Always keep good records of your tips.
 

• Report everything honestly—don’t try to hide tip income! 
• Watch for updates from the IRS about which jobs qualify. 
• Ask your employer if you’re not sure how to report your tips. 

This new rule could save you a lot of money if you work in a tip-based job. Just make sure to follow the steps, keep track of your income, and file your taxes correctly. If you have questions, consult a tax professional or visit this IRS website for more information.