No Tax on Tips for Servers and Bartenders: Worked Examples

Q: Which restaurant jobs are on the IRS list?

Only tips received in an occupation on the Treasury's List of Occupations that Receive Tips count. The final regulations (Treas. Reg. § 1.224-1, announced in IR-2026-49 on April 10, 2026) include these food and beverage codes (IRS list): Code Occupation IRS examples --------- 101 Bartenders Barkeep, mixologist, taproom attendant, sommelier 102 Wait staff Cocktail waitress, dining car server, banquet staff 103 Food or beverage servers, non-restaurant Room service server, beer cart server 104 Dining room and cafeteria attendants and bartender helpers Bar back, busser 105 Chefs and cooks Restaurant cook, sous chef, food truck cook 106 Food preparation workers Salad maker, sandwich maker 107 Fast food and counter workers Barista, ice cream server 108 Dishwashers Dish room worker 109 Host staff Maître d', dining room host 110 Bakers Bread baker, pastry finisher So a busser, host, cook or dish

Q: Does it lower Social Security and Medicare tax on my tips?

No. The deduction reduces federal income tax only. Social Security and Medicare taxes still apply to tips. If you received $20 or more in cash and card tips in a month from one job and didn't report them all to your employer, you must figure those taxes on Form 4137 (Pub. 531).

Q: When do I report tips to my employer?

Report each month's tips to your employer by the 10th of the next month (the next business day if the 10th falls on a weekend or legal holiday). If tips from one job are under $20 for a month, you don't report them to that employer. Not reporting can trigger a penalty of 50% of the Social Security and Medicare tax owed on the unreported tips (Pub. 531).

Last checked 2026-10-26 against IRS guidance

Restaurant workers are the group the federal tips deduction was built around. The IRS names wait staff and bartenders as examples of eligible workers (IRS Tax Tip 2026-06). This page walks through the rules and the IRS's own worked examples for front- and back-of-house jobs.

Rule	What the IRS says
Years	Tax years 2025 through 2028
Maximum deduction	$25,000 per year
Phase-out	Starts at MAGI over $150,000 ($300,000 joint)
Where you claim it	Schedule 1-A (Form 1040)
What it reduces	Federal income tax only (not Social Security or Medicare tax)

Which restaurant jobs are on the IRS list?

Only tips received in an occupation on the Treasury's List of Occupations that Receive Tips count. The final regulations (Treas. Reg. § 1.224-1, announced in IR-2026-49 on April 10, 2026) include these food and beverage codes (IRS list):

Code	Occupation	IRS examples
101	Bartenders	Barkeep, mixologist, taproom attendant, sommelier
102	Wait staff	Cocktail waitress, dining car server, banquet staff
103	Food or beverage servers, non-restaurant	Room service server, beer cart server
104	Dining room and cafeteria attendants and bartender helpers	Bar back, busser
105	Chefs and cooks	Restaurant cook, sous chef, food truck cook
106	Food preparation workers	Salad maker, sandwich maker
107	Fast food and counter workers	Barista, ice cream server
108	Dishwashers	Dish room worker
109	Host staff	Maître d', dining room host
110	Bakers	Bread baker, pastry finisher

So a busser, host, cook or dishwasher who gets a share of a tip pool is also in a listed occupation. See which occupations qualify for the full list.

Do tip-pool and tip-out amounts count?

Yes, if they meet the other rules. The IRS says qualified tips must be received from customers or, for an employee, "through a mandatory or voluntary tip-sharing arrangement, such as a tip pool" (IR-2026-49).

For reporting, IRS Publication 531 says that in a tip-splitting or tip-pooling arrangement you report to your employer only the tips you receive and retain. Don't report the part you pass on to other employees, but do report tips you receive from other employees (Pub. 531).

Is an automatic 18% large-party charge a tip?

No, not if the customer can't change it. The IRS gives this exact example: a restaurant adds an automatic 18% service charge for large parties and distributes it to waiters, bussers and kitchen staff. If there is no option for the customer to disregard or modify the charge, the amounts distributed are not qualified tips (IR-2026-49). That money is generally treated as wages instead.

A tip the customer chooses, such as an amount written on the "additional tip" line, is a tip (Pub. 531).

Worked example 1: server with tips in W-2 box 7

This is the IRS's own example (IR-2025-114, Notice 2025-69):

Ann is a restaurant server. Her 2025 Form W-2, box 7 shows $18,000 of Social Security tips.
She didn't report any extra tips on Form 4137.
Ann may use $18,000 as her qualified tips for 2025.

If her modified AGI is $150,000 or less, her deduction is the full $18,000, because it's under the $25,000 cap.

Worked example 2: bartender with unreported tips on Form 4137

Also from the IRS (IR-2025-114):

Bob is a bartender. He reported $20,000 of tips to his employer during 2025.
His W-2 shows $200,000 in box 1 and $15,000 in box 7.
He also reports $4,000 of unreported tips on Form 4137, line 4.
Bob may use either the $15,000 (box 7) or the $20,000 he reported to his employer, and either way he may add the $4,000 from Form 4137.

So Bob's qualified tips could be $24,000 ($20,000 + $4,000). But his income is high, so the phase-out matters. See example 4.

Worked example 3: tips over the $25,000 cap

Illustration (our numbers, IRS rules): A fine-dining server has $31,000 of qualified tips and MAGI of $90,000, single.

Qualified tips: $31,000
Cap: $25,000
Deduction: $25,000. The other $6,000 is still taxable.

Worked example 4: the income phase-out

Illustration (our numbers, IRS rules): The deduction is reduced by $100 for each $1,000 of MAGI over $150,000 ($300,000 joint) (IRS FS-2025-03). Say a single bartender has $24,000 of qualified tips and MAGI of $170,000.

MAGI over threshold: $170,000 − $150,000 = $20,000
Reduction: 20 × $100 = $2,000
Deduction: $24,000 − $2,000 = $22,000

Use the phase-out explainer or the calculator for your own numbers.

Does it lower Social Security and Medicare tax on my tips?

No. The deduction reduces federal income tax only. Social Security and Medicare taxes still apply to tips. If you received $20 or more in cash and card tips in a month from one job and didn't report them all to your employer, you must figure those taxes on Form 4137 (Pub. 531).

When do I report tips to my employer?

Report each month's tips to your employer by the 10th of the next month (the next business day if the 10th falls on a weekend or legal holiday). If tips from one job are under $20 for a month, you don't report them to that employer. Not reporting can trigger a penalty of 50% of the Social Security and Medicare tax owed on the unreported tips (Pub. 531).

Do allocated tips in W-2 box 8 count?

Unconfirmed: We haven't found an IRS statement that addresses allocated tips (W-2 box 8) for this deduction specifically. Pub. 531 says allocated tips aren't included in box 1 and must be reported as income if you didn't report all your tips. Check the Schedule 1-A instructions or a tax professional before counting box 8 amounts.

What changes for tax year 2026?

For 2025, W-2s didn't separately show qualified tips, which is why the IRS allowed box 7 and employer-report options. Starting with tax year 2026, employers must report cash tips in W-2 box 12, code TP (and qualified overtime in code TT), per the 2026 W-2 instructions. See W-2 box 12 TP and TT codes. Your state may treat tips differently. See the state-by-state tracker.

Want it on one page? Tips & overtime filing checklist + worksheet ($7, optional). Everything in it is also free on this site.

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