Claim No Tax on Tips with Side Job or Freelance Work: 2025 Tax Deduction

I've seen many small business owners struggle with tip reporting and the No Tax on Tips deduction. If you have qualified tips reported to your employer on Form W-2, Box 14b, using Treasury Tipped Occupation Codes (TTOC), you can claim this deduction with a side job or freelance work. But be sure to verify the tips with your employer to ensure accuracy.

Who Qualifies for the No Tax on Tips Deduction?

Your employer must report your tips on Form W-2, Box 14b, and use Treasury Tipped Occupation Codes (TTOC) to qualify for the No Tax on Tips deduction. For tax years 2025–28, the deduction caps at $25,000 of qualified tips per year, and phases out above $150,000 Modified Adjusted Gross Income (MAGI) for single filers, and $300,000 for married filing jointly (irs.gov, Publication 525, Taxable and Nontaxable Income). This deduction reduces federal income tax only, not FICA (7.65%).

How to Claim the No Tax on Tips Deduction?

To claim the No Tax on Tips deduction, report your qualified tips on your tax return. If you have unreported tip income, file Form 4137. Large food or beverage establishments must file Form 8027 to report employee tips. Consult the IRS publication 525 for more information.

Practical Tip

When claiming the No Tax on Tips deduction, make sure to keep accurate records of your tips and verify them with your employer to avoid any potential audits.

FICA Tip Credit and Tip Reporting/Allocation

Your employer must report tips of $20+ per month per employee on Form W-2, Box 14b. If you have a side job or freelance work, your employer may not report your tips on Form W-2, Box 14b. In this case, report your tips on Schedule C, Form 1040.

Key Takeaways