“No Tax on Tips”: A Quick Guide for Tipped Workers

Starting in 2025, many employees and self-employed individuals who earn tips can benefit from the new “No Tax on Tips” deduction. Here’s what you need to know in simple terms:

 

Who Qualifies?

• You must work in a job that the IRS lists as “customarily and regularly” receiving tips as of December 31, 2024.
• Tips must be reported on a Form W-2, Form 1099, or by you on Form 4137.
• If married, you must file jointly to claim the deduction.

What Tips Count?

• Only voluntary cash or charged tips from customers or through tip sharing qualify.
• Tips must be paid in cash, by card, or similar means. Non-cash items (like tickets or meals) don’t count.
• Mandatory service charges or automatic gratuities do not qualify unless the customer can freely change or remove the amount.

How Much Can You Deduct?

• You can deduct up to $25,000 in qualified tips per year from your taxable income.
• If you’re self-employed, your deduction can’t be more than your net business income (before this deduction) from the job where you earned the tips.
• The deduction phases out if your modified adjusted gross income (MAGI) is over $150,000 ($300,000 for joint filers).

Who Can’t Claim the Deduction?

• Self-employed people in “Specified Service Trades or Businesses” (like health, law, accounting, performing arts, consulting, athletics, and financial services) are not eligible.
• Employees whose employer is in one of these businesses also can’t claim the deduction.

Key Takeaway

 

This new deduction is a big help for many tipped workers, but you must meet all the requirements.