No tax on tips, explained for servers and bartenders

What is the no tax on tips deduction?

It's a federal income tax deduction for qualified tips, created by the One, Big, Beautiful Bill Act in 2025. You can deduct up to $25,000 of qualified tips a year from your taxable income, whether you itemize or take the standard deduction. You claim it on Schedule 1-A, which is attached to Form 1040.

Tips are still income. You still report every tip, and the deduction doesn't reduce Social Security or Medicare tax on them. State income tax follows your state's own rules.

Which tax years does it cover?

2025 through 2028. The deduction applies to tips received in those four tax years, starting with the return you filed in 2026. Unless Congress extends it, it ends after 2028.

How much can you deduct?

The cap

Up to $25,000 a year, per return. A married couple filing jointly shares one $25,000 limit, even if both of you earn tips. If you're married, you have to file jointly to take the deduction at all, and the person who received the tips needs a valid Social Security number on the return. If you're self-employed, the deduction can't be more than your net income from the work the tips came from.

The income phase-out

The deduction shrinks once your modified adjusted gross income is over $150,000, or $300,000 filing jointly. For each full $1,000 over that line, it drops by $100. A full $25,000 deduction is gone at $400,000 ($550,000 filing jointly). Below the line, the phase-out doesn't apply.

Which jobs qualify?

People working in an occupation where tips were customary on or before December 31, 2024. Treasury and the IRS published that list in final regulations (T.D. 10044) in April 2026: more than 70 occupations in eight categories, each with a three-digit Treasury Tipped Occupation Code (TTOC). Restaurant and bar work is the first category, Beverage and Food Service.

So servers (Wait Staff, 102), bartenders (101), and bussers, food runners and barbacks (104) are on it, and so are hosts, cooks and dishwashers who get a share of the tips. Valets, hotel staff, delivery drivers, stylists and many others are in the other categories.

A job on the list is necessary, not enough on its own. The tip has to be voluntary: the customer is free to decide whether to tip and how much. And tips don't qualify when your employer's business is one of the "specified service" trades the law leaves out, such as health, law or consulting.

What counts as a qualified tip?

A voluntary tip, in cash or charged, that a customer gives you or that you get through a tip pool or tip share. Cash, card, check and payment-app tips all count. The customer has to be free to decide whether to tip and how much, and the amount can't be negotiated or set by your employer.

Are service charges tips?

No. An automatic gratuity, a large-party charge or any other mandatory fee on the bill is a service charge, unless the customer can remove or change it. Your employer pays it to you as wages, and it is not a qualified tip. Publication 531's own example is an 18% charge added for parties of six or more.

What about noncash tips?

Tickets, passes and other items of value are still income, and they belong in your tip record, but only tips paid in cash or its equivalent are qualified tips.

Do tips you never reported count?

Only once they're reported. Qualified tips have to appear on a Form W-2 or Form 1099, or be reported by you on Form 4137, which also works out the Social Security and Medicare tax on tips your employer never heard about.

What records should you keep?

A daily tip record

IRS Publication 531 asks tipped employees to write down, each workday:

• the date
• cash tips from customers or from other employees
• card tips your employer pays you
• the value of any noncash tips
• tips you paid out through tip pools, tip splitting or tip outs, and the names of the people you paid

A tip diary works, and so do copies of the bills and card slips that show your tips. If your employer has an electronic tip record, keep a paper copy of it. Keep your records as long as they matter for your taxes.

A monthly report to your employer, by the 10th

If your tips at one job add up to $20 or more in a month, report them to that employer by the 10th of the next month (the next business day if the 10th falls on a weekend or holiday). The report gives your name, address and Social Security number, your employer's name and address, the month, and your total tips. Card tips are usually in your employer's system already, so cash tips are the ones that tend to go unreported.

The IRS used to provide Form 4070 for this report and Form 4070A for the daily record. It has since made both historical and retired Publication 1244, which held them, so most people now report through their employer's own system or a written statement with the same details.

How does the W-2 fit in?

Your W-2 shows the tips you reported to that employer. Box 7, Social Security tips, has always carried them. Starting with 2026 W-2s, Box 12 code TP shows the cash tips you reported, and Box 14b your occupation code. Box 8, allocated tips, means your employer thinks reported tips ran low.

For 2025, W-2s weren't required to show qualified tips separately, and the IRS lets you use Box 7, your own daily records or Form 4137 to work out the amount. With more than one job, each employer sends its own W-2, and the $25,000 cap covers them all together.

Check the W-2 against your own record before you file. A gap usually means tips that weren't reported, shifts that weren't logged, or a late-December shift whose tips you reported in January.

How Tipmik's Tax tools cover each of these

Tax tools are off until you turn them on, in More → Tax tools. Then Tipmik keeps the daily record and does the arithmetic. It doesn't file your taxes or tell you what to file.

• Who qualifies. Each job gets its occupation from the TTOC list, and whether you're paid on a W-2 or a 1099. Tips from a job that isn't on the list are kept, and left out of qualified tips.
• The daily record. Every shift keeps cash and card tips apart, tips in, each tip out and who received it, and service charges as their own line, never counted as tips. A scanned checkout photo stays with its shift, and changes after you've checked a record are logged.
• The 10th. At the start of each month, Tipmik shows last month's cash tips at each job and asks whether you reported them, with one reminder on the 8th.
• The cap. Qualified tips for the year, across all your jobs, against the $25,000 limit, with tips you haven't reported shown apart.
• Unreported tips. Totals by month and employer, ready for Form 4137 or your tax preparer.
• The W-2. Your declared tips for each employer next to Box 7 and, from 2026, Box 12 code TP. You answer Matches or Doesn't match; nothing from your W-2 is typed in or stored.
• Tax time. An export of your records as a PDF, or a ZIP with CSVs and checkout photos.

Tipmik keeps your tip record and does the arithmetic. It isn't tax advice; for your situation, ask a tax professional.

Sources

• IRS: Working Families Tax Cuts deductions, the deduction's cap, years, phase-out and filing rules
• IRS: Schedule 1-A (Form 1040), where the deduction and its phase-out are worked out
• IRS: final regulations on tipped occupations and T.D. 10044 in the Federal Register
• IRS: occupations that customarily received tips, the TTOC list
• IRS: guidance for tips received in 2025
• IRS Publication 531, Reporting Tip Income, the daily record, the monthly report and service charges
• IRS: Form 4137, for tips not reported to an employer
• IRS: General Instructions for Forms W-2 and W-3, Box 7, Box 12 code TP and Box 14b