Are Tips Taxable? How the ‘One Big Beautiful Bill Act’ Changed Taxes on Tips
Many tipped workers now qualify for a federal income tax deduction on tip income — but there are a few exceptions to know about.
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In 2025 (taxes filed in 2026), some taxpayers will now be allowed to deduct up to $25,000 in tip income when they file their annual returns. This change is a result of the “One Big Beautiful Bill Act” (OBBBA), which was passed into law on July 4, 2025.
Since deductions reduce the amount of your income that gets taxed, this can mean savings for some come tax time. Keep in mind, though, that the deduction only counts for federal taxable income — you may still have to pay state, local, and payroll taxes (i.e., Medicare and Social Security) on your tipped income.
How employers will classify tip income on reporting forms and which industries qualify for the deduction are details that are still in development.
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How the 'no tax on tips' deduction works
Here’s what to know about which kind of tips qualify, income limits for claiming the deduction and more.
Qualifying tips
Tips that count include those paid voluntarily by debit or credit card, in cash, or through a tip-sharing program.
Tips that weren’t properly reported and tracked by employers and mandatory service charges do not count toward the deduction. Service charges include things like bottle service, room service, delivery fees and gratuity automatically added for large parties.
Income limits
Taxpayers whose modified adjusted gross income is $150,000 or less are eligible for the full deduction. For joint filers, this limit doubles to $300,000.
The deduction is reduced by $100 for every $1,000 a taxpayer’s income exceeds those limits.
The deduction is not available for single taxpayers making above $400,000 or joint filers making above $550,000.
Other details of note
To claim the deduction, you must provide your Social Security number on your tax return.
You do not have to itemize on your tax return to claim the deduction.
If you’re married, you must file jointly to take advantage of the deduction. Married people filing separately are not eligible.
The deduction is valid from 2025 through 2028 only. This year is considered a transition period in which employers may approximate tip income or may be allowed to use partial payroll information if full W‑2 reporting isn't yet standardized.
The deduction only applies to federal income tax. Social Security and Medicare taxes (FICA) must still be withheld on all tips, qualified or not.
Do you have to report tips?
Yes, tips count as income. Even though you may get a deduction when you file, you still need to report the full amount of tip income you received throughout the year to both your employer and the IRS and pay federal taxes on any amount of tipped income over the deduction limit.
If you’re considering skirting the rules, don’t forget that tips on credit and debit cards also leave a paper trail, which could come back to haunt you if you're audited. Plus, the Social Security Administration doesn’t know you earned the money if you don’t report your tips, which could affect the size of your benefits when you retire.
How to keep track of tips
Keep a record of tips you get in cash and via credit or debit card for each day you work. If you don’t have a tracking method of your own, you can use IRS Form 4070A
If you have to share or pool your tips, keep daily records of what you actually net. For example, if you get $100 in tips but have to give $25 to the bartender and $25 to the busser, you'd net $50.
Report your tips every month
The IRS requires you to report your tips monthly to your employer if they total more than $20. You’ll need to turn in a Form 4070 by the 10th of the month after you receive the tips. For example, if you made $100 in tips in January, you'd need to report those by Feb. 10. Note that you don’t give the form to the IRS; you give it to your employer, who uses it to calculate how much payroll tax to withhold from your paycheck.
Your employer is allowed to require you to report your tips more than once a month and may offer an electronic reporting method instead.
When you file your tax return, report your tips again
At the end of the year, your employer will provide a W-2 form reflecting your wages and the tips you reported; a copy goes to the IRS. You use the W-2 to file your tax return.
Remember, when you file your Form 1040, you need to report all of your tips — even the ones from months when the total was less than $20.