Service industry workers who depend on tips have a new tax benefit to look forward to when they file their 2025 tax returns. The “No Tax on Tips” provision, part of the One Big Beautiful Bill Act signed into law on July 4, 2025, allows eligible workers to deduct qualified tips from their taxable income.
This new law could put thousands of dollars back into the pockets of servers, bartenders, hairstylists, and other tipped employees. Here’s what you need to know about who qualifies, how much you can deduct, and the income limits that apply.
Who Is Eligible for the Tips Deduction?
The deduction is available to both employees and self-employed individuals who work in occupations that customarily and regularly receive tips. The IRS is required to publish an official list of qualifying occupations by October 2, 2025, based on which jobs were receiving tips on or before December 31, 2024.
While the complete list is not yet available, typical qualifying occupations are expected to include restaurant servers, bartenders, coffee shop baristas, hairstylists and barbers, hotel bellhops and valets, taxi and rideshare drivers, and food delivery workers.
To claim the deduction, you must report your tips on Form W-2 (for employees), Form 1099, Form 4137, or another specified statement. Both employees who receive W-2s and self-employed individuals who report their own income can take advantage of this deduction.
However, there are important restrictions. Self-employed individuals working in what the tax code calls a “Specified Service Trade or Business” cannot claim the deduction. Employees whose employers operate in these restricted business categories are also ineligible. Additionally, you must include your Social Security Number on your tax return, and married taxpayers must file jointly to qualify.
How Much Can You Deduct?
Under the new law, you can deduct qualified tips up to a maximum of $25,000 per year. Qualified tips include voluntary cash tips, charged tips (added to credit card payments), and tips received through tip-sharing arrangements with coworkers.
If you earned $18,000 in tips during 2025, you can deduct the entire amount from your taxable income. If you earned $30,000 in tips, you can deduct $25,000, with the remaining $5,000 subject to regular income tax.
For self-employed workers, there’s an additional limitation. Your deduction cannot exceed your net income from the business where you earned the tips. This means if your business had $20,000 in net income (after expenses), your tips deduction is capped at $20,000, even if you received more than that amount in tips.
The deduction is available whether you itemize deductions or take the standard deduction, making it beneficial for all eligible taxpayers.
Income Phase-Out Limits
The tips deduction begins to phase out for higher-income taxpayers. This ensures the benefit primarily helps workers who rely most heavily on tip income.
For single filers, the deduction starts to reduce when your modified adjusted gross income exceeds $150,000. The deduction disappears completely at higher income levels through a gradual reduction formula.
For married couples filing jointly, the phase-out threshold is $300,000 of modified adjusted gross income. As income rises above this amount, the available deduction gradually decreases until it’s eliminated entirely.
Modified adjusted gross income is your adjusted gross income with certain deductions added back. Most taxpayers can simply use their adjusted gross income figure from their tax return.
What You Need to Do
The new law requires employers and other payors to report tip information to both the IRS and to workers. You should receive documentation showing your qualified tips on your W-2 or other tax statements. Keep all records of tips you receive throughout the year, including cash tips that you report to your employer.
When you file your 2025 tax return in early 2026, you’ll claim this deduction on your Form 1040. The IRS has announced it will provide transition relief for the 2025 tax year, recognizing that both taxpayers and employers are adjusting to the new requirements.
Tax preparation software will be updated to include this new deduction, making it easier to claim when you file. If you use a tax professional, make sure to mention that you received tips during the year so they can determine if you qualify.
Temporary Provision
It’s important to note that this tax benefit is temporary. The “No Tax on Tips” deduction is currently scheduled to remain in effect from 2025 through 2028. Unless Congress extends the provision, it will expire after the 2028 tax year.
For service workers who have long advocated for tax relief, this new law represents meaningful financial support. By reducing the tax burden on tip income, the provision acknowledges the essential role these workers play in the economy and helps them keep more of what they earn.
As the IRS continues to issue guidance and clarification, workers in tipped occupations should stay informed about the specific requirements and deadlines. The official IRS website at www.irs.gov will provide updates and additional details as they become available.
About the Author: John Gregory is an Enrolled Agent and owner of 1040Return.com, a low-cost tax preparation software for individual filers.
