No Tax on Tips: Federal Rules Explained (2025–2028)
The 2025 tax law (Public Law 119-21, signed July 4, 2025) added a federal deduction for qualified tips under Internal Revenue Code § 224. Here are the rules as the IRS states them.
| Rule | What the IRS says |
|---|---|
| Years | Tax years 2025 through 2028 |
| Maximum deduction | $25,000 per year |
| Phase-out | Reduced by $100 for each $1,000 of MAGI over $150,000 ($300,000 joint) |
| Who | Employees and self-employed people in occupations the IRS lists as customarily receiving tips on or before Dec. 31, 2024 |
| Itemize? | Available whether or not you itemize |
| SSN | You must include your Social Security number on the return |
| Married | Must file jointly to claim it |
What counts as a qualified tip?
Voluntary cash or charged tips from customers, or received through tip sharing, that are reported on a Form W-2, Form 1099, or other specified statement, or that you report yourself on Form 4137. Mandatory service charges are not voluntary, so they generally do not qualify.
Does it remove Social Security and Medicare tax?
No. The deduction reduces federal income tax only. Tips are still subject to Social Security and Medicare (FICA) taxes and, for self-employed people, self-employment tax.
Who is excluded?
Self-employed people in a "specified service trade or business" (SSTB) under § 199A, and employees whose employer is an SSTB, cannot claim it.
Sources
- IRS Fact Sheet FS-2025-03: tax deductions for working Americans
- 26 U.S. Code § 224 – Qualified tips and § 225 – Qualified overtime compensation
- IRS FS-2026-13: overtime deduction Q&A
- Public Law 119-21 (congress.gov)
→ Estimate your deduction with the free calculator
More guides
- 7 Common Mistakes Claiming No Tax on Tips or Overtime
- How to Claim No Tax on Tips and Overtime on Your Return (Schedule 1-A)
- No Tax on Overtime: How Much Will I Save? Real Examples
- No Tax on Tips & Overtime Phase-Out Explained (MAGI $150,000 / $300,000)
- What Counts as Qualified Overtime for the No Tax on Overtime Deduction
- No Tax on Tips for Self-Employed and Gig Workers
- Does No Tax on Tips Apply to State Taxes?
- Which Jobs Qualify for No Tax on Tips? Eligible Occupations
- W-2 Box 12 Codes TP and TT: Tips and Overtime Reporting