No Tax on Tips: How the New Deduction Works

The information in this article is up to date for tax year 2026 (returns filed in 2027).

No tax on tips is a federal income tax deduction of up to $25,000 a year for workers in 71 IRS-listed tipped occupations. It covers tax years 2025 through 2028 and phases out above $150,000 of modified adjusted gross income ($300,000 for joint filers). Tips are still subject to Social Security and Medicare taxes, and to state income tax in many states.

If you earn tips at work, this new tax break could save you hundreds or even thousands of dollars. Here’s who qualifies, which tips count, how much you can deduct, and how to claim it on your federal tax return.

Key Takeaways

• “No Tax on Tips” is a federal income tax deduction created by the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. It is not a full exemption: payroll taxes still apply to every dollar of tips.
• Eligible workers can deduct up to $25,000 of qualified tips per return. The deduction shrinks once MAGI passes $150,000 ($300,000 joint).
• Qualified tips are voluntary, customer-determined tips paid in cash or a cash equivalent. That includes credit and debit cards, checks, payment apps, gift cards, and casino chips. Automatic gratuities, mandatory service charges, and crypto don’t count.
• Tips must be reported on Form W-2, Form 1099, or Form 4137. Starting with 2026 W-2s, employers report tips in Box 12 (code TP) and your occupation code in Box 14b.
• ezTaxReturn.com guides you step by step through entering your received tips, checking occupation eligibility, and automatically applying the new deduction and federal income tax withholding rules on your return.

Is No Tax on Tips Real? Did It Pass?

Yes. No tax on tips became federal law when the One Big Beautiful Bill Act was signed on July 4, 2025. It created a new deduction for qualified tip income, separate from the standard deduction.

Despite the name, your tips are not completely tax free. The deduction lowers your federal taxable income, so you pay less federal income tax on your tips. It does not reduce Social Security and Medicare taxes, and it doesn’t automatically carry over to your state return.

The same law created a related No Tax on Overtime deduction for qualified overtime pay. If you earn both tips and overtime, you can claim both.

When Does No Tax on Tips Start and End?

No tax on tips applies to tips received from January 1, 2025, through December 31, 2028. Tips earned before 2025 don’t qualify, and the deduction ends after the 2028 tax year unless Congress extends it.

• July 4, 2025: The law was signed. It applied retroactively to the entire 2025 tax year.
• Early 2026: Workers claimed the deduction for the first time on their 2025 tax returns.
• April 2026: Treasury and the IRS issued final regulations, including the final list of over 70 qualifying occupations.
• Tax year 2026 (returns filed in 2027): New W-2 reporting begins, with tips in Box 12 (code TP) and occupation codes in Box 14b.
• After December 31, 2028: The deduction expires under current law.

Are tips taxed in 2026?

Yes. Tips are still taxable income in 2026, and you must report them. The difference is that eligible workers can then deduct up to $25,000 of qualified tips, which reduces the federal income tax they owe.

Is no tax on tips permanent?

No. Under current law, it is a temporary deduction that covers tax years 2025 through 2028. Congress could extend it, change it, or let it expire.

Who Qualifies for No Tax on Tips?

You qualify for no tax on tips if you work in an occupation on the IRS list of jobs that customarily and regularly received tips on or before December 31, 2024, and you meet all of these requirements:

• Your tips are qualified tips (see “What Counts as a Qualified Tip?” below).
• Your tips are reported on Form W-2, Form 1099, or Form 4137.
• You have a Social Security number that is valid for employment, and you include it on your return.
• If you’re married, you file a joint return. Married filing separately is not eligible.
• Your tips aren’t received through a specified service trade or business (SSTB). See below.
• Your income is below the phase-out range, or you accept a reduced deduction.

Which occupations qualify?

The final regulations list over 70 occupations, grouped into eight categories, and give each one a three-digit Treasury Tipped Occupation Code (TTOC). The list is exhaustive: if your job isn’t on it, your tips don’t qualify. You can check your job on the official IRS list of qualifying occupations.

Examples of eligible workers include:

• Bartenders, wait staff, baristas, and other food and beverage workers
• Hotel bellhops, concierges, and housekeepers
• Casino dealers
• Hairstylists, barbers, and nail technicians
• Golf caddies, parking valets, and gas pump attendants
• Delivery drivers, rideshare drivers, and taxi drivers
• Personal trainers and tour guides
• Visual artists and floral designers (both added in the final regulations)

Who doesn’t qualify?

• Jobs not on the list. Doctors, lawyers, accountants, tax preparers, and most office workers don’t qualify, even if someone occasionally gives them a tip.
• Workers in a specified service trade or business (SSTB). By law, tips received through an SSTB don’t qualify. SSTBs include fields such as health, law, accounting, consulting, financial services, athletics, and performing arts. The IRS has temporarily suspended enforcement of this rule under Notice 2025-69 until it issues SSTB-specific regulations. If you work for one of these businesses, check how your employer reports your tips.
• Managers and supervisors who receive money from a tip pool. Under the final regulations, these amounts are not qualified tips.
• Tips paid by your employer, or by a business you have an ownership stake in. The rules treat these as wages relabeled as tips.
• Married couples filing separately.

If you work two jobs for the same employer and only one is on the list, only the tips you earn in the qualifying job count.

What Counts as a Qualified Tip?

A qualified tip is a voluntary payment that the customer decides on, isn’t required to pay, and doesn’t negotiate. It must be paid in cash or a cash equivalent, and it must be received in a qualifying occupation. “Cash tips” is a legal term here. It covers any payment denominated in cash, not just paper bills.

Non-cash tips that don’t qualify, such as concert tickets, are still taxable income and must be reported. They just can’t be deducted.

Does no tax on tips include credit card tips?

Yes. No tax on tips is not limited to paper cash. Tips paid by credit card, debit card, check, gift card, or payment app all count as “cash tips” under the rules, as long as they meet the other requirements.

How Much Can You Deduct? The $25,000 Cap and Income Limits

You can deduct up to $25,000 of qualified tips per return. The limit applies per return, not per person, so a married couple filing jointly shares a single $25,000 cap even if both spouses earn tips.

The deduction phases out at higher incomes. It shrinks by $100 for every $1,000 of modified adjusted gross income (MAGI) above the threshold, until it reaches zero.

Worked examples:

In the married couple example, the $32,000 of tips is first capped at $25,000. The $20,000 of income above the $300,000 threshold then reduces the deduction by $2,000.

For this deduction, MAGI is your adjusted gross income plus certain excluded foreign income (such as the foreign earned income exclusion). For most workers, it’s simply their AGI.

How Much Will No Tax on Tips Save Me?

Your savings are roughly your qualified tip deduction multiplied by your federal tax bracket. A single bartender with $10,000 of qualified tips in the 22% bracket saves about $2,200 in federal income tax. A worker in the 12% bracket with the same tips saves about $1,200.

The deduction is not refundable. If the standard deduction and credits already bring your federal income tax to zero, the tip deduction won’t increase your refund. Analysts have pointed out that many lower-income tipped workers may see limited savings for this reason. To estimate your own numbers, try our free tax calculator.

How to Calculate Your No Tax on Tips Deduction

1. Total your qualified tips. Use W-2 Box 12 (code TP), Form 4137, and any 1099 forms (if self-employed).
2. Apply the $25,000 cap.
3. If you’re self-employed, apply the net income limit. Your deduction can’t exceed your net income from the business that earned the tips.
4. Reduce the result by any phase-out based on your MAGI.

Example: A single delivery driver earns $30,000 in tips through delivery apps. After $12,000 of business expenses (vehicle, phone, supplies), their net profit on Schedule C is $18,000.

• Qualified tip income: $30,000
• Net income limit: $18,000 (the deduction can’t exceed net profit)
• $25,000 cap: not reached
• MAGI: $85,000 (below $150,000, so no phase-out)
• Final deduction: $18,000. At a 22% rate, that’s about $3,960 in federal income tax saved.

How to Claim No Tax on Tips on Your Tax Return

You claim the deduction on Schedule 1-A, and the total carries to Form 1040, line 13b. You don’t need to itemize. It’s available whether you take the standard deduction or itemize.

1. Report all of your tips as income first. Employees’ tips are included in W-2 wages (Form 1040, line 1). Self-employed workers report them on Schedule C.
2. Find your qualified tip amount. Look at W-2 Box 12 (code TP), Form 1099-NEC (Box 1b, with the occupation code in Box 1c), or Form 4137.
3. Complete Schedule 1-A. Enter your qualified tips, apply the $25,000 cap, and calculate any MAGI phase-out.
4. Carry the deduction to Form 1040, line 13b. It reduces your taxable income but not your AGI.

How to read your 2026 Form W-2

If Box 12 code TP or Box 14b is missing or looks wrong, ask your employer for a corrected W-2 before you file.

Reporting Your Tips: Records and Employer Reporting

Keep a daily log of your tips. If you receive $20 or more in tips in a month, report them to each employer by the 10th of the following month. You can use Form 4070 or your employer’s electronic system.

• Form W-2: Your employer includes reported tips in your wages and withholds income tax, Social Security, and Medicare on them.
• Form 4137: If you didn’t report some tips to your employer, use Form 4137 to calculate Social Security and Medicare tax on them. Tips reported on Form 4137 can still be qualified tips if they meet the other requirements.
• Forms 1099: Self-employed and gig workers receive Form 1099-NEC, 1099-MISC, or 1099-K. Starting in 2026, the 1099-NEC has separate boxes for qualified tips and the occupation code.

Not reporting tips can lead to back taxes and penalties. Accurate records are also the best support for your deduction if the IRS asks questions.

Do I Still Pay Social Security and Medicare on Tips?

Yes. No tax on tips only affects federal income tax. Employees still pay 7.65% in Social Security and Medicare taxes on every dollar of tips, and self-employed workers still pay 15.3% self-employment tax. The upside is that those tips still count toward your Social Security earnings record.

Does No Tax on Tips Apply to State Taxes?

It depends on your state. Each state decides whether to adopt federal tax changes. As of May 2026, 19 of the 41 states that tax wages had adopted the No Tax on Tips deduction. Some states adopted it only starting with tax year 2026, and others still tax all tips.

State rules are still changing, so check your state’s revenue department before you file. When you file with ezTaxReturn.com, your state return reflects your state’s current treatment of tips.

Are tips taxed in California?

Yes. California has not adopted the federal deduction. California workers must add the federal tip deduction back on their state return and pay California income tax on all of their tips.

Are tips taxed in Texas or Florida?

Not at the state level. Texas and Florida don’t tax wages, so there’s no state income tax on tips. Federal income tax and payroll taxes still apply, and the federal tip deduction still reduces federal income tax.

How No Tax on Tips Affects Other Credits and Deductions

The tip deduction reduces taxable income, not AGI. Credits and limits based on AGI, such as the Earned Income Tax Credit and the Child Tax Credit income limits, generally aren’t changed by it. That’s one reason it’s worth understanding how credits differ from deductions.

Special Rules for Self-Employed and Gig Workers

Rideshare drivers, delivery workers, tour guides, and other independent contractors can claim the deduction too, with a few extra rules:

• Your deduction can’t exceed your net income from the business that earned the tips.
• You still pay self-employment tax on all net earnings, including tips.
• The SSTB rule applies to your own business. If your business is an SSTB, your tips don’t qualify.
• Only the tips you actually receive count. Amounts a platform keeps are not qualified tips.
• Keep tips separate from fares, delivery fees, and service charges in your records.

If you’re filing taxes as an independent contractor, ezTaxReturn supports your 1099-NEC and 1099-K data, asks about your tips, and calculates the deduction for you. You can also review common deductions for independent contractors.

Tips to Get the Most from the Deduction

• Keep a tip log. Record the date, employer or platform, amount, and payment method, even if your employer tracks tips.
• Check your W-2 in January. Make sure Box 12 (code TP) and Box 14b are filled in correctly.
• Watch your income. A second job or a spouse’s raise can push you into the phase-out range.
• Review your Form W-4. If you expect a lower tax bill, you can reduce your withholding and take home more each paycheck.

How ezTaxReturn Helps You File with No Tax on Tips

ezTaxReturn is an IRS-authorized online tax filing service built for fast, affordable, and accurate returns.

• Guided tip questions: Enter or import your W-2 and 1099 forms, answer a few questions about your job and tips, and we identify your qualified tips.
• Automatic calculations: We apply the $25,000 cap, the MAGI phase-out, and the self-employed net income limit, and place the deduction on Schedule 1-A and Form 1040.
• Affordable filing: Transparent pricing, a biggest refund guarantee, and free U.S.-based customer support.

Start for FREE at ezTaxReturn.com and see how the No Tax on Tips deduction could change your refund.

No Tax on Tips FAQs

Are my tips completely tax free?

No. You can deduct up to $25,000 of qualified tips from federal taxable income, but Social Security and Medicare taxes still apply, and many states still tax tips. It’s a deduction, not a full exemption.

Is no tax on tips only for cash tips?

No. Credit card, debit card, check, app, and gift card tips all count as “cash tips.” Only non-cash items like tickets or goods, and crypto, are excluded.

What is the limit on no tax on tips?

The cap is $25,000 per return. The deduction is reduced by $100 for every $1,000 of MAGI above $150,000 ($300,000 for joint filers).

Do servers and bartenders still pay taxes on tips?

Yes. Servers and bartenders still report all tips and pay payroll taxes on them. Most can deduct up to $25,000 of those tips when calculating federal income tax.

Do automatic gratuities count?

No. Automatic gratuities and mandatory service charges are treated as wages, not tips, so they don’t qualify.

Do I have to itemize to claim no tax on tips?

No. You claim it on Schedule 1-A, and you can take it along with the standard deduction.

Does no tax on tips change how I report tips to my employer?

No. You still report $20 or more in monthly tips to each employer by the 10th of the following month. You claim the deduction later, on your tax return.

Can I claim the deduction if I forgot to report some cash tips?

Yes, if they otherwise qualify. Report the missing tips on Form 4137 with your return and pay the Social Security and Medicare tax on them. Tips reported on Form 4137 can be qualified tips.

When does No Tax on Tips expire?

Under current law, the deduction ends after the 2028 tax year. Congress would have to act to extend it.

Can I benefit if I don’t owe any federal income tax?

Not directly. The deduction isn’t refundable, so if your federal income tax is already zero, it won’t increase your refund. You may still save through other credits and deductions.

Sources

• U.S. Treasury and IRS: final regulations on occupations that customarily and regularly receive tips (April 2026; Federal Register, April 13, 2026)
• IRS Notice 2025-69 (transition relief for specified service trades or businesses)
• IRS instructions for Schedule 1-A (Form 1040) and 2026 Form W-2
• Ballotpedia: state conformity to the No Tax on Tips deduction (May 28, 2026)

The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.