08/12/2025
No tax for qualified tips
For millions of Americans working in hospitality
and other service industries, tips are a vital part of
their income. Until now, tips were considered taxable
income for federal tax purposes, and workers had to
report them to the IRS and pay income tax.
What’s changed?
The new law allows up to $25,000 per year in tip
income to be deducted from your taxable income for
tax years 2025 through 2028. The deduction is not an
exclusion from gross income, but a deduction when
you file your tax return. This means you won’t see
any withholding changes to your paycheck.
The deduction is NOT a full exclusion; tips still count
toward Social Security and Medicare taxes. The
deduction only applies to cash or card-based tips that
you receive in qualifying jobs, but not to any service
charges, regular wages or non-cash rewards.
Example: At a restaurant, Sarah’s bill includes a
15% service charge automatically added because
she is part of a large group. She pays the total with
her credit card. Even though it looks like a tip on the
receipt, it’s a mandatory fee and not eligible for the
tip income deduction. Her server is Jamal; therefore,
Jamal cannot count the 15% service fee as a tip.
• The maximum deduction is $25,000 per year.
• Phaseout: The deduction is reduced by $100for each $1,000
(or fraction thereof) by which
the taxpayer’s modified adjusted gross income
MAGI exceeds $150,000 ($300,000 for
joint filers).
The deduction is only allowed for tips that are:
• Included on a tax information reporting form
such as Form W-2, Form 1099 or similar. These
are usually tips the employer records or that the
employee reports to their employer, or
• Reported by the taxpayer on Form 4137
(Social Security and Medicare tax on
unreported tip income)
Qualifying occupations: The IRS will publish a list
of occupations that customarily and regularly receive
tips before the end of 2025. Examples likely include
waiters, bartenders, hotel bellhops, casino dealers,
hairdressers and other similar service roles.
Other requirements: The deduction is only available
if the taxpayer includes their Social Security number
on their tax return, and for married individuals, only
if they file jointly.
Example: Maria is a waitress at the People’s Pig, a
BBQ joint, which is a qualifying occupation. In 2025,
she receives $30,000 in cash and card tips, all of
which she reports to her employer and includes on her
Form W-2. Her total income for the year is $70,000
($30,000 for tips and the rest is regular wages). She
is a single taxpayer. Because her MAGI is less than
$150,000, Maria can deduct $25,000 of the $30,000
of tips on her tax return, making her adjusted gross
income (before other deductions) $45,0000 instead
of $70,000.
