The "One, Big, Beautiful Bill Act" signed into law in July 2025 provides a new tax deduction related to tip income. Effective for tax years 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations listed by the IRS as customarily and regularly receiving tips.
Key Details
- Qualified tips are voluntary cash or charged tips received from customers. Service charges added to the bill by the employer are not eligible.
- Maximum annual deduction is $25,000 or net income for self-employed taxpayers, if lower.
- Deduction starts to be reduced if modified adjusted gross income exceeds $150,000 or $300,000 for single and joint filers, respectively
- Deduction is available whether you itemize deductions or take the standard deduction
- Employees of and self-employed individuals in a Specified Service Trade or Business ("SSTB") are not eligible to take the deduction.
- Married filing separate filers are not eligible to take the deduction.
Employers must report qualified tip information to the IRS and employees on Forms W-2 or other information returns. Transition relief is available for 2025 reporting and deductions. For 2025, employees may use the amount of tips reported in Box 7 of Form W-2, tips voluntarily reported by your employer in Box 14 of Form W-2, the amount of tips reported by the employee to the employer on Form 4070, or the amount of tips an employee reports on Form 4137.
