Will You Benefit From No Taxes on Tips?

The IRS just named which jobs qualify for the new $25,000 tip deduction—see if yours made the list.

Roughly 4 million workers receive tips in their occupations. OlegD/Shutterstock

The Internal Revenue Service just published the official list of what occupations can deduct tips. More than 68 occupations and eight industries qualify. But if your job isn’t on the list, you’re out of luck.

It’s a preliminary list, because workers had until Oct. 22, according to the Federal Register, to comment and plead their case. But who’s on the list? And exactly what does it mean when it says no taxes on tips?

Occupations That Can Deduct $25,000 in Tips

According to The Budget Lab, roughly 4 million workers are in tipped occupations. That includes 2.5 percent of all employment. These occupations include numerous industries.

The One Big Beautiful Bill Act identified occupations that customarily and regularly receive tips. It also defined “qualified tips” that eligible taxpayers may claim. According to the IRS, the resolution groups the occupations into eight categories:

• Beverage and Food Service
• Entertainment and Events
• Hospitality and Guest Services
• Home Services
• Personal Services
• Personal Appearance and Wellness
• Recreation and Instruction
• Transportation and Delivery

There’s a list of jobs within each category.

For example, Forbes reports that under Entertainment and Events, it includes club dancers, disc jockeys, gambling and sports book writers and runners, coat room attendants, ushers, and more.

What Are Qualified and Non-Qualified Tips?

Workers must be on the list and receive qualified tips to receive the deduction.

The IRS states that qualified tips must be paid in cash or an equivalent medium. This can be:

• check
• credit card
• debit card
• gift card
• tangible or intangible tokens that are readily exchangeable for a fixed amount of cash
• other forms of electronic settlement or mobile payment applications

Qualified tips must be received from customers. An employee can also receive them through a mandatory or voluntary tip-sharing arrangement; for example, a tip pool.

However qualified tips must be paid voluntarily by the customer, and not subject to negotiation. They also don’t include service charges.

For example, an automatic 18 percent service charge for large parties that restaurants tack onto the bill can’t be deducted by the employee if the customer wasn’t given an option.

And, finally, tips on illegal activities, pornographic activities, or prostitution services are not qualified tips.

How No Tax on Tips Works

According to the Bipartisan Policy Center, the no tax on tips policy is a federal income tax deduction. This means it reduces taxable income and, consequently, tax liability for the worker claiming it. The deduction is capped at $25,000 per year. It’s available whether the taxpayer takes the standard deduction or itemizes.

Taxpayers with eligible tips can claim their deduction when they file their 2025 tax forms. But in future years, the deduction will be applied to tax withholding for some workers. This way, they will experience lower taxes on each paycheck rather than a lump sum when they file their returns.

The deduction is temporary and applies from January 1, 2025, through December 31, 2028.

Does Modified Adjusted Gross Income Matter With Tips Deduction?

The tips deduction phases out for higher earners. Once a single taxpayer exceeds $150,000 in modified adjusted gross income (MAGI), the deduction phases out at a 10 percent rate until it reaches zero. For married couples, it’s $300,000 MAGI.

For example, the deduction would reach zero at $400,000 in MAGI, and for a married couple claiming the maximum, it would hit zero at $550,000 in MAGI.

Medicare, Social Security, and Tip Deductions

According to H&R Block, the deduction applies to your federal income taxes, but, unfortunately, Social Security and Medicare deductions (FICA taxes) are not included. So, although the worker may qualify for the tip deduction, they are still subject to Social Security and Medicare taxes from their pay. The amount reported for Social Security and Medicare will be on the taxpayer’s W-2 form.

What Does a Taxpayer Need to Do to Report Tips?

There are several steps to reporting tips.

According to H&R Block, workers are required to report their monthly tips from the prior month by the tenth of each month. Some employers have a process for reporting tips. Form 4070 also can be used to report tip income.

Workers can also create their own report. It should include:

• name, address, and Social Security number
• employer’s address
• month or period report covers
• total amount of tips received during the period

If the worker has an employer, they will report tips to the worker and the IRS on the W-2 form as part of the worker’s gross income.

Taxpayers Should Keep a Daily Tip Log

A daily tip log should be kept to ensure all tip income is accurately reported. This will help claim the deduction.

This doesn’t have to be a formal spreadsheet. It can be a notebook. The worker should keep records up to date in real time, rather than trying to remember later.

Tip Deduction Available to Select Workers

There are several job categories for tipped workers. Workers should check their jobs and whether they are listed. The type of tips is also essential.

Although workers will receive a lump sum for 2025 deductions, after that, tips will be deducted from their paychecks.

The no tips on tax policy is temporary and only lasts until December 2028.

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