A federal tax deduction could help millions of workers who earn tips lower their taxable income. Eligible employees and self-employed workers may deduct up to $25,000 in qualified tips each year. The deduction applies to tax years 2025 through 2028, but workers must meet certain IRS requirements to qualify.
New Tax Deduction for Workers Who Earn Tips
Workers who regularly receive tips may qualify for a federal tax deduction of up to $25,000 per year. The deduction is part of recent federal tax changes affecting tipped workers. It is available to qualifying employees as well as some self-employed workers.
Instead of receiving a $25,000 payment from the government, qualifying workers can deduct eligible tip income from their taxable income. This can reduce the amount of income that is subject to federal income tax.
Who Can Qualify for the $25,000 Deduction?
The deduction is available to workers in occupations that the IRS recognizes as jobs that traditionally and regularly received tips on or before December 31, 2024. Qualified tips can include voluntary cash tips, tips paid by credit or debit card, and certain tips shared between workers.
Workers must properly report their tip income. Depending on the situation, the tips may appear on forms such as a W-2 or 1099, or they may be reported directly by the worker using the appropriate IRS form.
Workers must also have a valid Social Security number. Married taxpayers generally must file a joint tax return to claim the deduction.
You Can Deduct Up to $25,000
The maximum deduction for qualified tips is $25,000 per year.
For example, if an eligible worker receives $15,000 in qualified tips during the year, the worker may be able to deduct the full $15,000. If the worker receives $30,000 in qualified tips, the maximum deduction is generally limited to $25,000.
Self-employed workers have an additional limitation. Their deduction cannot be greater than the net income from the business where they earned the tips. The deduction is available whether a taxpayer takes the standard deduction or itemizes deductions.
Higher-Income Workers May Receive a Smaller Deduction
Income limits can reduce the amount some taxpayers are allowed to deduct. The deduction begins to phase out when modified adjusted gross income exceeds $150,000 for individual taxpayers or $300,000 for married couples filing jointly.
This means higher-income taxpayers may qualify for only part of the deduction instead of the full amount.
Not every person who receives tips automatically qualifies. Certain workers and businesses are excluded under IRS rules, so taxpayers should verify that their occupation and income meet the requirements.
The Tax Break Is Available Through 2028
The tipped-worker deduction is currently available for tax years 2025 through 2028. That means eligible workers could potentially use the deduction for several tax years rather than receiving a one-time tax benefit.
Taxpayers should keep accurate records of their tip income and make sure their earnings are properly reported. The IRS has also created Schedule 1-A for taxpayers to claim the new deduction when filing Form 1040.
Workers who are unsure whether their tips qualify may want to speak with a tax professional before filing their return.
How Local Tax Can Help
New tax deductions can be confusing, especially when the rules determine which tips qualify and how much you can deduct. Local Tax can help you understand the new tax rules, review your income and tip records, and make sure you claim the deductions you qualify for. Our team can also help with individual tax preparation, small business taxes, corporate taxes, bookkeeping, and payroll services. If you earn tips or have questions about how the latest tax changes may affect your return, Local Tax can help you prepare and file your taxes correctly.
