No Tax on Tips is a federal income tax deduction, not a tax exemption. For tax years 2025 through 2028, workers in occupations that customarily received tips can deduct up to $25,000 of qualified tips per return on Schedule 1-A. The deduction phases out above $150,000 of modified adjusted gross income ($300,000 if married filing jointly), and Social Security and Medicare taxes still apply.
The rules at a glance
- Years: tax years 2025, 2026, 2027, and 2028. It was enacted July 4, 2025 in the One, Big, Beautiful Bill Act, which the IRS now also calls the Working Families Tax Cuts.
- Amount: up to $25,000 of qualified tips per return, the same cap for single and joint filers.
- Who: employees and self-employed people in an occupation on the Treasury list (irs.gov/TippedOccupations). You need a valid Social Security number, and married couples must file jointly.
- Phase-out: the deduction drops $100 for every full $1,000 of MAGI over $150,000 ($300,000 joint).
- Where: Schedule 1-A, Part II. The total flows to Form 1040, line 13b, whether you itemize or take the standard deduction.
- Not covered: Social Security and Medicare tax (7.65% for employees), state income tax, and mandatory service charges.
How does No Tax on Tips work?
Your tips are still income. They still go in your wages on Form W-2 (or on a 1099), and payroll still withholds on them. When you file, Schedule 1-A lets you subtract the qualified portion, up to $25,000, from your taxable income. That lowers your federal income tax. It doesn't change your Social Security or Medicare tax, and it doesn't make your tips disappear from your paycheck or W-2.
Because it is a deduction rather than a credit, what it saves you depends on your tax bracket. If Ann, a server, has $18,000 of tips in Box 7 of her W-2 and all of it is qualified, she can deduct $18,000. If those dollars would otherwise be taxed at 12%, that's roughly $2,160 less federal income tax. Run your own numbers with our No Tax on Tips calculator.
What counts as a qualified tip?
- Voluntary cash or charged tips from customers. That covers tips paid in cash, on a credit or debit card, and through tip sharing or tip pools.
- Received in an occupation that customarily and regularly received tips on or before December 31, 2024, meaning one of the occupations on the Treasury list.
- Reported on a Form W-2, Form 1099, or another statement furnished to you, or reported by you on Form 4137.
Mandatory service charges and automatic gratuities aren't voluntary, so they are wages, not tips (Revenue Ruling 2012-18), and they don't qualify.
Who qualifies for No Tax on Tips?
The Treasury list has 68 occupations, each with a three-digit Treasury Tipped Occupation Code (TTOC), in 8 categories. It runs from bartenders (101) and wait staff (102) to hairdressers, tour guides, rideshare drivers (802), and app-based delivery workers (804). Look up any job in our full TTOC code list or on the IRS list at https://www.irs.gov/forms-pubs/occupations-that-customarily-and-regularly-received-tips-on-or-before-dec-31-2024
- You must have a valid Social Security number, and it must be on your return.
- If you're married, you must file jointly. Married filing separately can't claim it.
- It works whether you itemize or take the standard deduction.
- Workers in a specified service trade or business (SSTB) under section 199A are excluded by law. For now, under Notice 2025-69, the IRS treats anyone in a listed occupation as not being in an SSTB until final regulations take effect.
The $25,000 limit and the income phase-out
Schedule 1-A applies the limits in a fixed order. Line 7 is the smaller of your qualified tips or $25,000. Then lines 9–12 reduce it if your modified adjusted gross income (MAGI) is over $150,000, or $300,000 for joint filers:
- Subtract $150,000 ($300,000 joint) from your MAGI.
- Divide by $1,000 and round down to a whole number.
- Multiply by $100. That's your reduction.
- Subtract the reduction from the line 7 amount. That's your deduction (never below zero).
| Example (single filer) | Qualified tips | MAGI | Reduction | Deduction |
|---|---|---|---|---|
| Under the threshold | $18,000 | $48,000 | $0 | $18,000 |
| Partly phased out | $10,000 | $162,500 | 12 × $100 = $1,200 | $8,800 |
| Over the cap and threshold | $30,000 (capped at $25,000) | $200,000 | 50 × $100 = $5,000 | $20,000 |
| Fully phased out | $25,000 | $400,000 | 250 × $100 = $25,000 | $0 |
Self-employed and gig workers
Self-employed people in a listed occupation can claim the deduction too, but it can't exceed the net income (before this deduction) of the business where the tips were earned. On Schedule 1-A, line 5 takes the qualified tip amount included in Form 1099-NEC box 1, Form 1099-MISC box 3, or Form 1099-K box 1a, and you can't enter more than that business's net profit.
For 2025, 1099s don't separate tips from other pay. The IRS lets you rely on your own records instead. In its example, a self-employed tour guide whose $55,000 Form 1099-K didn't break out tips used a daily log showing $7,000 of tips to claim $7,000.
How to claim the deduction
- Confirm your job is on the Treasury occupation list.
- Total your qualified tips. Employees with one employer use the larger of W-2 Box 7 social security tips (Schedule 1-A line 4a) or the tips on Form 4137, line 1, row A, column (c) (line 4b). Self-employed workers use the tip amount on their 1099s or their own records, capped at the business's net profit (line 5).
- Complete Schedule 1-A, Part I (MAGI) and Part II (No Tax on Tips, lines 4–13).
- Carry your total additional deductions to Form 1040, line 13b.
What changes on 2026 W-2s
- Box 12, code TP: the total cash tips you reported to your employer.
- Box 14b: up to two Treasury Tipped Occupation Codes for the jobs where you earned tips, plus "000" if any tips came from a non-qualifying occupation.
- For 2025 returns these boxes didn't exist yet, which is why the IRS allows Box 7, Form 4137, and your own records.
What No Tax on Tips does not do
| Item | Covered? | Why |
|---|---|---|
| Federal income tax on qualified tips | Yes | Up to $25,000 per return via Schedule 1-A |
| Social Security and Medicare tax | No | The deduction reduces income tax only |
| State income tax | Not by this law | Each state decides whether to follow the federal deduction |
| Service charges and auto-gratuities | No | They're wages, not voluntary tips |
| Tips from a non-listed occupation | No | Only occupations on the Treasury list qualify |
| Tips after 2028 | No | The deduction is for tax years 2025–2028 |
What employers need to know
The deduction belongs to the worker. Employers don't claim it, but they now report more. Starting with 2026 Forms W-2, employers report the total cash tips employees reported in Box 12 with code TP and the employee's Treasury Tipped Occupation Code(s) in Box 14b. Employers still collect income tax and both halves of Social Security and Medicare on reported tips. Food, beverage, and (from 2025) beauty-service employers can still claim the separate FICA tip credit on Form 8846. Workers with unreported tips should see our Form 4137 guide.
Is No Tax on Tips real?
Yes. It was enacted July 4, 2025 as part of the One, Big, Beautiful Bill Act and applies to tax years 2025 through 2028. It is a deduction of up to $25,000 of qualified tips claimed on Schedule 1-A, not a full exemption from all taxes.
What is the No Tax on Tips limit?
$25,000 of qualified tips per return per year, for both single and joint filers. It is reduced by $100 for every full $1,000 of MAGI over $150,000 ($300,000 joint). For self-employed workers it also can't exceed the net income of the business where the tips were earned.
Who qualifies for No Tax on Tips?
Employees and self-employed people who receive voluntary tips in an occupation on the Treasury list of jobs that customarily received tips on or before December 31, 2024. They need a valid SSN, and married couples must file jointly.
Does No Tax on Tips include credit card tips?
Yes. Qualified tips include voluntary cash or charged tips, so tips added on a credit or debit card count the same as paper cash, as long as the other rules are met.
Do I still pay Social Security and Medicare on tips?
Yes. The deduction only lowers federal income tax. Employees still owe the 7.65% Social Security and Medicare tax on tips, through payroll or on Form 4137 for unreported tips.
Can I claim No Tax on Tips if I'm married filing separately?
No. If you're married, you must file a joint return to claim the deduction.
This article is general information, not tax advice. Rules were checked against IRS guidance, Notice 2025-69, and the 2025 Schedule 1-A in October 2026. Treasury has proposed regulations that may refine some details.