No Tax on Tips

The New Tips Deduction

Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024.

Tips must be reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.

• “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.
• Maximum annual deduction is $25,000; for self-employed, deduction may not exceed the individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned.
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.

• Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible. Employees whose employer is in an SSTB are also not eligible.
• Taxpayers must: include their Social Security Number on the return and file jointly if married, to claim the deduction.

Reporting: Employers and other payors must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient.

Guidance: By October 2, 2025, the IRS must publish a list of occupations that “customarily and regularly” received tips on or before December 31, 2024.

• The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.

Why Electronic Filing Is Recommended

Because this deduction involves new rules, income limits, and reporting forms, electronic filing is highly recommended.

E-filing benefits include:

• Automatic verification of income limits and phaseouts

• Proper integration of W-2, 1099, and Form 4137 data

• Reduced risk of IRS processing delays or notices

• Faster refunds through direct deposit

• Built-in error checks for new deductions

Most tax software is updated as soon as IRS guidance is released, making it easier to claim this deduction correctly.

This new qualified tips deduction can provide meaningful tax relief for eligible workers from 2025 through 2028.

Filing electronically and ensuring tips are properly reported are the best ways to take full advantage of this benefit while avoiding costly mistakes.