Tipped workers in 70+ qualifying occupations can now deduct up to $25,000 in voluntary tip income from federal taxes — but Social Security and Medicare taxes still apply, and most states have not adopted the exclusion.
The One Big Beautiful Bill Act created a new federal income tax deduction for tipped workers. For 2025 through 2028, workers in 70+ qualifying occupations — from servers and bartenders to rideshare drivers and nail technicians — can deduct up to $25,000 in voluntary customer tips on Schedule 1-A. Social Security and Medicare taxes still apply. Most states have not adopted the exclusion.
The One Big Beautiful Bill Act, signed in 2025, created a new federal income tax deduction for workers in tipped occupations. For tax years 2025 through 2028, workers in qualifying jobs can deduct up to $25,000 in voluntary tip income per year from their federal taxable income — whether or not they itemize deductions.
This is a meaningful change for servers, bartenders, rideshare drivers, hairdressers, and millions of other service workers who previously paid federal income tax on every dollar of tip income at their ordinary rate. The deduction does not eliminate FICA taxes — Social Security and Medicare still apply in full — but it removes the federal income tax burden on qualifying tip income up to the limit.
For the full list of individual OBBBA changes — including overtime income, the SALT cap increase, and the child tax credit — see One Big Beautiful Bill: Individual Tax Changes for 2026.
The IRS published a formal list of qualifying occupations at IRS.gov/tippedoccupations. Workers must be in a listed occupation to claim the deduction — not every job that occasionally receives a tip qualifies.
The IRS grouped qualifying occupations into 8 categories covering 70+ specific jobs:
1. Beverage and Food Service — Waiters, waitresses, bartenders, baristas, food runners, and buspersons. 2. Entertainment and Events — Event staff, coat check attendants, ticket takers, and casino dealers. 3. Hospitality and Guest Services — Hotel bellhops, doormen, concierge staff, and resort guest-services workers. 4. Home Services — Housecleaners, furniture movers, and in-home service workers where tipping is customary. 5. Personal Services — Tattoo artists, massage therapists, and spa service providers. 6. Personal Appearance and Wellness — Hairdressers, barbers, estheticians, nail technicians, cosmetologists, and personal trainers. 7. Recreation and Instruction — Golf caddies, bowling alley staff, and ski instructors. 8. Transportation and Delivery — Taxi drivers, rideshare drivers (Uber, Lyft), app-based delivery drivers (DoorDash, Instacart), shuttle drivers, and valets.
The final IRS rule also added Visual Artists, Floral Designers, and Gas Pump Attendants.
Who does not qualify: Workers in "specified service trades or businesses" (SSTBs) — health care, law, financial advisory, performing arts, athletics, and consulting — are excluded even if their clients sometimes tip. A physical therapist who receives tips cannot claim the deduction because health care is an SSTB under Section 199A rules.
If you are unsure whether your occupation qualifies, the full authoritative list is at IRS.gov/tippedoccupations.
The maximum deduction is $25,000 per year — but only on tips you actually received. If your qualifying tips totaled $14,000, you deduct $14,000 (not $25,000).
Qualifying tips include: - Cash tips left directly by customers - Tips added to credit or debit card charges - Tips received through tip pools or tip-sharing arrangements - Tips reported on Form W-2 (Box 7), Form 1099-NEC, Form 1099-MISC, Form 1099-K, or Form 4137
Income phase-out: The deduction phases out when your modified adjusted gross income (MAGI) exceeds: - $150,000 for single filers, head of household, or married filing separately - $300,000 for married couples filing jointly
Workers comfortably below these thresholds receive the full deduction. Those above may receive a reduced or no deduction.
Not every customer payment counts as a qualified tip under the OBBBA. The IRS definition requires all four of the following:
1. The payment was voluntary — the customer chose to leave it 2. The customer set the amount — not the employer or a menu charge 3. It was not subject to negotiation — not a quoted service fee 4. It was not reclassified by the employer as regular wages
This distinction matters most in restaurants. An automatic 18% gratuity added to a large party's check is a mandatory service charge — the employer collects it and distributes it to staff as regular wages, which are fully taxable. Only the cash or card tips customers leave voluntarily qualify for the deduction.
For rideshare and delivery app workers: tips customers add through the app interface are voluntary and generally qualify. Platform service fees that flow to the company are not tips.
The most important thing to understand about this deduction: it reduces your federal income tax on tips, not your Social Security and Medicare taxes.
FICA taxes — Social Security (6.2% on earnings up to the annual wage base, per SSA.gov) and Medicare (1.45% on all earnings, plus a 0.9% surcharge above $200,000 single / $250,000 joint) — still apply to tip income in full. A server who earns $22,000 in tips and claims the full $22,000 deduction saves the federal income tax on those tips; Social Security and Medicare obligations are unchanged.
Employers also continue to withhold and remit FICA on reported tips through normal payroll. The deduction is a separate step on the individual's annual tax return — it does not affect payroll withholding during the year.
If you are self-employed, see the Self-Employment Tax Guide for how SE tax on your total earnings interacts with the tip deduction.
The One Big Beautiful Bill is a federal law. State income taxes follow their own rules and are unaffected unless a state passes conforming legislation:
A bartender in California who eliminates federal income tax on $20,000 in tips still owes California income tax on those same $20,000. Check your state's department of revenue for any conformity legislation.
The IRS created Schedule 1-A (Form 1040) specifically for OBBBA deductions, including tips, overtime, auto loan interest, and the senior deduction. Steps to claim the tip deduction:
1. Gather documentation. Collect W-2 Box 7 figures, any 1099s showing tip income, your daily tip log, and Form 4137 if you have unreported tips. 2. Confirm your occupation qualifies at IRS.gov/tippedoccupations. 3. Calculate qualifying tips for the year, capped at $25,000. 4. Complete Schedule 1-A and carry the deduction to Schedule 1, which flows to Form 1040.
The deduction is above the line — it reduces your AGI whether you take the standard deduction or itemize. You do not need to itemize to benefit.
For self-employed workers in a qualifying occupation: The deduction cannot exceed your net income from the tip-receiving business before the deduction is applied. If your net self-employment income is $18,000 and your qualifying tips totaled $22,000, your deduction is limited to $18,000.
Filed early for 2025? Taxpayers who filed their 2025 return before the IRS published final guidance may not have claimed this deduction. The IRS noted that an amended return (Form 1040-X) may be required to capture it retroactively for 2025.
The deduction covers 2025, 2026, 2027, and 2028. Three practical steps for workers in qualifying occupations:
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*This content is for educational purposes only and does not constitute tax or legal advice. Tax rules change frequently and individual circumstances vary. Consult a licensed CPA or enrolled agent for guidance specific to your 2025 and 2026 returns.*
Yes. Transportation and Delivery is one of the 8 qualifying IRS categories. Tips voluntarily added by customers through Uber, Lyft, DoorDash, Instacart, and similar apps count as qualified tips. Platform service fees that flow to the app company are not tips and do not qualify.
Yes. Tip reporting and payroll-withholding obligations have not changed. You still report cash tips over $20 per month to your employer, and your employer withholds Social Security and Medicare taxes through payroll. The no-tax-on-tips deduction is a separate step you take on your personal Form 1040 at tax time — it does not affect how tips are reported or taxed during the year.
A voluntary tip is one the customer chose to leave and set the amount for. A mandatory service charge — like an automatic 18% gratuity added to large party checks — is collected by the employer and distributed to staff as wages. Those wages are taxable in full and do not qualify for the tip deduction. Only voluntary customer tips meet the IRS definition of a qualified tip.
Yes. Self-employed individuals in qualifying occupations can claim the deduction. However, it cannot exceed your net income from the tip-receiving business before the deduction is applied. If your net self-employment income is $15,000 and your qualifying tips were $20,000, your deduction is limited to $15,000.
Yes. The deduction is temporary, covering tax years 2025, 2026, 2027, and 2028. Without further Congressional action, it will expire after the 2028 tax year. Workers in qualifying occupations should take full advantage while the provision is in effect.