Overview of the New Federal Tip Income Deduction (2025–2028)
Under the Big Beautiful Bill Act enacted on July 4, 2025, taxpayers who earn tips in qualifying occupations can claim a new temporary federal deduction for tax years 2025 through 2028. Eligible individuals may deduct up to $25,000 of qualified tip income on their federal income tax return.
The deduction begins to phase out when adjusted gross income (AGI) reaches:
- $150,000 for single filers
- $300,000 for married filing jointly (MFJ)
This deduction is claimed on Schedule 1-A (Additional Deductions), Part II, and reduces AGI directly.
What Counts as Qualified Tip Income? (IRS Definition)
Qualified tip income includes cash tips received by workers in occupations that customarily and regularly received tips on or before December 31, 2024, based on the list provided by the Treasury Secretary.
Types of Cash Tips That Qualify
- Cash tips paid directly by customers
- Tips paid via credit or debit cards
- Voluntary tips distributed through tip-sharing arrangements
Who Can Claim the Tip Income Deduction? (Eligibility Requirements)
To qualify for the deduction, taxpayers must meet all of the following:
- Must have a valid Social Security Number
- Married taxpayers must file jointly (MFJ)
- Tip income is still subject to Social Security and Medicare taxes
Self-Employed Workers
Self-employed individuals may claim the deduction for any tips earned in connection with their trade or business as long as they have net income for the year.
Who Is NOT Eligible? (Specified Service Trades or Businesses)
Workers employed in or operating a Specified Service Trade or Business (SSTB) under Section 199A are not eligible. SSTBs include:
- Health
- Law
- Accounting
- Actuarial services
- Performing arts
- Consulting
- Athletics
- Financial services
- Brokerage services
How to Calculate Qualified Tip Income for 2025 (Per IRS Notice 2025-69)
IRS Notice 2025-69 outlines how employees and self-employed individuals should determine their qualified tip income for the 2025 tax year.
Step-by-Step: Determining Qualified Tip Income
Use the following sources in this order:
- Form W-2, Box 14
- If your employer reports qualified tip income here, use this amount.
- Form W-2, Box 7 (Social Security Tips)
- If Box 14 is blank, use the amount of Social Security tips reported in Box 7.
- Forms 4070 (Employee’s Report of Tips to Employer)
- Add up the total tips reported on all Forms 4070 filed during the year.
- Form 4137, Line 4
- Include any unreported tip income listed on line 4 that is subject to Social Security and Medicare taxes.
IRS guidance also explains how to determine qualified tip income for:
- Self-employed individuals
- Employees who worked for a specified trade or business
IRS Resources for Understanding the Tip Income Deduction
For more information, taxpayers and preparers can review the following IRS publications:
- IRS News Release IR-2025-92 – Treasury and IRS list occupations where workers customarily receive tips under the Big Beautiful Bill
- One Big Beautiful Bill Provisions Page – No Tax on Tips Section
- IRS News Release IR-2025-14 – Guidance for individuals who received tips or overtime during 2025
- IRS Notice 2025-69 – Detailed guidance for calculating qualified tip and overtime compensation for 2025
