How does no tax on tips work?
“No tax on tips” is the common name for a federal income tax deduction for qualified tips, added by the One, Big, Beautiful Bill Act. Tips are still income. You report them the same way as before, and at filing time you subtract qualified tips from your taxable income on Schedule 1-A.
The IRS rules in brief:
- Years: tax years 2025 through 2028.
- Who: employees and self-employed people who receive tips in an occupation on the Treasury list.
- Limit: $25,000 per return. Married couples share one limit and must file jointly.
- Phase-out: the deduction drops by $100 for each full $1,000 of modified adjusted gross income (MAGI) above $150,000, or $300,000 on a joint return.
- Paperwork: a valid Social Security number, and tips reported on a Form W-2, a Form 1099 or Form 4137.
- Itemizing: not required. It works with the standard deduction.
The calculator above adds your tips, wages and other income to estimate MAGI, applies the cap and phase-out, and compares 2026 federal income tax with and without the deduction. It also shows the Social Security and Medicare tax you still owe on those tips. If you also work overtime, the no tax on overtime calculator handles that separate deduction.
Which jobs qualify for no tax on tips?
Only tips received in an occupation that “customarily and regularly” received tips on or before December 31, 2024 qualify. Treasury and the IRS announced the final list in April 2026. The rules took effect June 12, 2026, and apply to tax years beginning after December 31, 2024. The list has more than 70 occupations, each with a three-digit Treasury Tipped Occupation Code (TTOC).
| Codes | Category | Examples from the list |
|---|---|---|
| 101 to 110 | Beverage and food service | Bartenders, wait staff, chefs and cooks, baristas, dishwashers, hosts, bakers |
| 201 to 211 | Entertainment and events | Casino dealers, musicians and singers, DJs, digital content creators, ushers, coat check attendants |
| 301 to 304 | Hospitality and guest services | Bellhops and porters, concierges, hotel desk clerks, hotel housekeepers |
| 401 to 409 | Home services | Handymen, home electricians and plumbers, HVAC installers, house cleaners, locksmiths, tow truck drivers |
| 501 to 510 | Personal services | Personal care aides, wedding planners, event photographers, pet groomers and sitters, tutors, nannies, visual artists, florists |
| 601 to 611 | Personal appearance and wellness | Barbers and hairstylists, nail technicians, massage therapists, makeup artists, personal trainers, tattoo artists, tailors |
| 701 to 706 | Recreation and instruction | Golf caddies, music and art teachers, tour guides, ski and diving instructors |
| 801 to 810 | Transportation and delivery | Valet attendants, taxi and rideshare drivers, shuttle drivers, delivery drivers, car wash attendants, movers, gas pump attendants |
A few points about the list:
- The occupations are fixed, but the job titles are examples. The final regulations say a hiking guide fits the travel guide code (705) even though it is not named.
- Kitchen jobs are included. Dishwashers and cooks are on the list because employees can receive tips through tip-sharing arrangements.
- Some jobs were added late. Visual artists, floral designers and gas pump attendants were added in the final rules. If you already filed a 2025 return without the deduction, the IRS says an amended return may be needed to claim it.
- Two jobs, one listed. If you work in a listed occupation and one that is not listed, only the tips from the listed job qualify.
What counts as a qualified tip?
A tip qualifies only if all of these are true:
- The customer pays it voluntarily, with no consequence for not paying.
- The amount is not negotiated.
- The customer decides the amount.
- It is a cash tip, received in a listed occupation, and not received in a specified service trade or business (see below).
Cash tips versus charged and non-cash tips
“Cash tips” in this law means more than paper money. It covers tips paid in cash or charged, and for employees, tips received through a tip-sharing arrangement.
| Type of tip | Qualified tip? |
|---|---|
| Cash, including foreign currency | Yes |
| Check, credit card, debit card or gift card | Yes |
| Payment apps and tip screens that pay a fixed dollar amount | Yes |
| Casino chips and similar tokens worth a fixed amount of cash | Yes |
| Share of a tip pool, for employees | Yes, except pool money paid to managers or supervisors |
| Event tickets, meals, services or other non-cash items | No, though they are still taxable income |
| Digital assets, including stablecoins | No |
Are mandatory service charges tips?
No. An automatic 18% charge added to a large party’s bill is a service charge set by the business, not a tip, even if the restaurant passes it to staff. The IRS treats service charges paid to employees as wages.
A charge counts as a tip only if the customer is expressly told they can change it or remove it, down to zero. Tip screens with a slider that goes to zero, or an “other” option where the customer can enter zero, are voluntary. Anything a customer adds on top of a mandatory charge can still be a qualified tip.
What is the SSTB exclusion for tips?
The law excludes tips received in a specified service trade or business (SSTB), a term borrowed from the qualified business income deduction. SSTB fields include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services. For an employee, the test looks at the employer’s business, not the employee’s own job.
For now, this rule is on hold. Under Notice 2025-69, the IRS treats a worker in a listed occupation as not receiving tips in an SSTB until January 1 of the first calendar year after final SSTB regulations are issued. The April 2026 final regulations left the SSTB rules for later guidance, and Treasury plans to propose them for public comment first.
Can self-employed and gig workers deduct tips?
Yes, if the work is in a listed occupation, such as rideshare driving, food delivery or event photography. Two extra limits apply:
- The deduction cannot exceed the net profit from the business where you earned the tips, figured before this deduction.
- The SSTB rule applies to your own business, with the same transition relief.
The deduction does not reduce self-employment tax. You still owe 15.3% on net earnings from self-employment: 12.4% for Social Security, up to the yearly wage base, and 2.9% for Medicare.
How much does no tax on tips save?
These examples use 2026 federal brackets and the standard deduction ($16,100 single, $32,200 joint), with no other income, deductions or credits.
Example 1: restaurant server, single filer
Riley Chen is a server who earns $22,000 in hourly wages and reports $24,000 in tips.
- MAGI: $22,000 + $24,000 = $46,000
- Deduction: $24,000, under the cap with no phase-out
- Taxable income: $29,900 before the deduction, $5,900 after
- Federal income tax: $3,340 before, $590 after
- Federal income tax saved: $2,750
- Still owed on tips: $24,000 x 7.65% = $1,836 in Social Security and Medicare
This deduction reaches into two brackets: $17,500 comes out of the 12% bracket and $6,500 out of the 10% bracket.
Example 2: bartender, married filing jointly
Morgan Diaz tends bar and reports $31,000 in tips plus $28,000 in wages. Morgan’s spouse earns $60,000, and they file jointly.
- MAGI: $31,000 + $28,000 + $60,000 = $119,000
- Deduction: capped at $25,000, because the cap is per return
- Taxable income: $86,800 before, $61,800 after, all in the 12% bracket
- Federal income tax saved: $25,000 x 12% = $3,000
- Social Security and Medicare still apply to all $31,000 of tips: $2,371.50
Example 3: self-employed rideshare driver
Drew Patel drives for a rideshare app as an independent contractor. For the year, Drew receives $30,000 through the app, including $6,000 of tips shown separately, and has $26,000 of deductible business expenses.
- Net profit: $30,000 - $26,000 = $4,000
- Deduction: limited to $4,000, not $6,000
- If Drew’s taxable income falls in the 12% bracket, that saves about $480
Phase-out example
Pat and Jamie Brooks file jointly. Pat, a bartender, has $20,000 in tips and $25,000 in wages, and Jamie earns $274,400.
- MAGI: $20,000 + $25,000 + $274,400 = $319,400
- Excess over $300,000: $19,400, which rounds down to 19, and 19 x $100 = $1,900
- Deduction: $20,000 - $1,900 = $18,100
- Federal income tax saved in the 24% bracket: $4,344
With the full $25,000 of tips, a single filer’s deduction reaches zero at $400,000 of MAGI, and a joint return reaches zero at $550,000.
Do you still pay Social Security and Medicare on tips?
Yes. Tips are generally subject to income tax withholding and to Social Security and Medicare taxes when you receive $20 or more in a month. The employee share is 6.2% for Social Security, up to the $184,500 wage base in 2026, plus 1.45% for Medicare. The deduction changes none of that. To see tips, wages and taxes together in your take-home pay, try the paycheck calculator.
How do you report tips to your employer?
The reporting rules did not change:
- Keep a daily tip record.
- Report cash tips to your employer by the 10th of the following month if they total $20 or more for the month from that employer. No specific IRS form is required, and card tips count as cash tips.
- Non-cash tips, such as tickets, are not reported to your employer, but they go on your tax return as income.
- Unreported cash tips go on Form 4137, where you also pay the employee share of Social Security and Medicare. Tips reported this way can still be qualified tips.
Your base hourly pay follows separate rules; see minimum wage by state. If you also work over 40 hours a week, the overtime calculator shows your time and a half pay.
What shows on your W-2 for tips?
For 2025 returns. W-2s were not updated, and Notice 2025-62 waived penalties for employers that did not report tips separately. Under Notice 2025-69, employees could use the social security tips in box 7, the tips they reported to the employer on Form 4070 or a similar monthly report, or an amount the employer voluntarily listed in box 14, plus any tips on Form 4137. Self-employed workers could use earnings statements, sales system reports, daily tip logs or similar records.
For 2026 and later. Box 12 with code TP shows the total cash tips you reported to your employer, and new box 14b shows up to two Treasury Tipped Occupation Codes. If any of your tips came from a job not on the list, your employer must enter 000 as one of the codes. Forms 1099-NEC, 1099-MISC and 1099-K are also being updated to show tips separately.
To see the savings in your paychecks this year, use the 2026 Form W-4 Step 4(b) Deductions Worksheet. If your total income is under $150,000 ($300,000 joint), enter your estimated qualified tips on line 1a, up to $25,000. The change is spread over your remaining paychecks, so see how many pay periods are in a year for your schedule.
Do states tax tips?
State rules vary. Each state decides whether to follow the federal deduction, create its own or skip it. Hawaii, for example, adopted the federal tips deduction for tax years beginning after December 31, 2025, but not the overtime deduction. Check your state revenue department before assuming your state return gets the same break.
These are general federal rules. Because occupation codes, SSTB status and self-employment income can be complicated, a tax professional can review how the deduction applies to your situation.