Deducting Business Expenses from Tip Income: Tax Return Guide
Tax Content Lead · 9/3/2026
If you’re a tipped worker, you can deduct business expenses related to your tip income on your tax return using Form 2106 or Form 2106-EZ. However, the total business expense deduction is subject to an 80% limit, and you can only claim up to $25,000 in qualified tips per year. According to the IRS, the No Tax on Tips deduction caps at $25,000 of qualified tips per year, phases out above $150,000 Modified Adjusted Gross Income ($300,000 married filing jointly), and applies to tax years 2025–28. This deduction reduces federal income tax only — FICA (7.65%) still applies to tips.
Key takeaways
- Tipped workers can deduct up to $25,000 in qualified tips per year with an 80% limit on business expense deductions.
- Business expenses for tipped workers include uniforms and equipment, travel, meals, and home office use.
- Tipped workers must keep accurate records of expenses, including receipts and bank statements, to claim business expense deductions.
- The No Tax on Tips deduction phases out above $150,000 Modified Adjusted Gross Income ($300,000 married filing jointly) for tax years 2025–28.
Reporting Business Expenses on Your Tax Return
To report business expenses on your tax return, you must complete Form 2106 or Form 2106-EZ, which is attached to Schedule A of your tax return (Form 1040), and report the total qualified tips from Box 14b of your W-2 form. You’ll need to provide detailed records of your expenses, including receipts and bank statements.
- Uniforms and equipment
- Travel expenses
- Meals while working
- Home office use
According to the IRS instructions for Form 2106, you can deduct the following expenses related to your tip income:
Uniforms and equipment are deductible if they are required for your work and are not suitable for everyday use. Check the Treasury Tipped Occupation Codes (TTOC) to ensure your occupation is eligible for the deduction. For more information, see the IRS instructions for Form 2106, available at https://www.irs.gov/forms-pubs/about-form-2106.
You can also deduct expenses for travel, such as transportation and lodging, and meals while working, but only if you keep accurate records of your expenses. For home office use, you must meet specific requirements, such as using a dedicated space for business purposes and keeping accurate records of your expenses.
For example, let’s say you are a server who earns $50,000 in tip income per year, and you have $1,000 in expenses for uniforms and equipment, $2,000 in travel expenses, and $3,000 in meals while working. You can claim a total of $6,000 in business expenses on your tax return, but you must reduce the amount by 20% to $4,800, as the 80% limit applies to the total business expense deduction.
As a server, I’ve found that keeping a separate bank account for business expenses helps me track my expenses accurately. Make sure to save your receipts and bank statements to support your business expense deduction.
If you have a Modified Adjusted Gross Income (MAGI) above $150,000 ($300,000 married filing jointly), the No Tax on Tips deduction will phase out, and you should consult the IRS instructions for Form 2106 for more information.
Comparing Options for Business Expense Deductions
You can choose to deduct business expenses on your tax return using Form 2106 or Form 2106-EZ, or you may be able to deduct business expenses on your tax return using the standard mileage rate for business use of your vehicle. According to the IRS instructions for Form 2106, you can use the standard mileage rate if you keep accurate records of your business use of your vehicle, including the number of miles driven and the date of each trip.
You can use the standard mileage rate of 58.5 cents per mile for business use of your vehicle in 2023. See the IRS website at https://www.irs.gov/newsroom/standard-mileage-rates for more information.
Form 2106 is used to claim the business expense deduction for employees who have expenses related to their tip income. Form 2106-EZ is a simplified version of Form 2106 and is used to claim the business expense deduction for employees who have expenses related to their tip income.
To choose between Form 2106 and Form 2106-EZ, you should consult the IRS instructions for Form 2106.
For more information on deducting business expenses from tip income, consult the IRS instructions for Form 2106.
Keep accurate records of your expenses to support your business expense deduction.
Key Forms and Schedules
You will need to complete the following forms and schedules to claim the business expense deduction for tip income:
- Form 2106: Business Use of Your Home
- Schedule A (Form 1040): Itemized Deductions
- Form 8027: Employer’s Annual Information Return of Tip Income and Allocated Tips
You can find more information on these forms and schedules on the IRS website.
Frequently Asked Questions
What is the 80% limit for business expense deductions?
The 80% limit applies to the total business expense deduction, and you can only claim up to $25,000 in qualified tips per year.
What expenses are eligible for the business expense deduction?
Eligible expenses include uniforms, equipment, travel expenses, and meals while working.
Can I use the standard mileage rate for business use of my vehicle?
Yes, you can use the standard mileage rate if you keep accurate records of your business use of your vehicle, including the number of miles driven and the date of each trip.
What is the No Tax on Tips deduction?
The No Tax on Tips deduction is a tax provision that allows employees to exclude up to $25,000 in qualified tips from their income tax liability, but it will phase out for employees with a Modified Adjusted Gross Income (MAGI) above $150,000 ($300,000 married filing jointly).
Real-World Example
Let’s say you are a server who earns $50,000 in tip income per year and has expenses related to your work, including uniforms and equipment, travel expenses, and meals while working.
| Expense | Amount |
|---|---|
| Uniforms and equipment | $1,000 |
| Travel expenses | $2,000 |
| Meals while working | $3,000 |
Key Takeaways
- Deduct business expenses related to tip income on your tax return using Form 2106 or Form 2106-EZ.
- Keep accurate records of your expenses to support your business expense deduction.
- The 80% limit applies to the total business expense deduction.