TL;DR: Under the federal "No Tax on Tips" provision (IRC §224, enacted in the One Big Beautiful Bill Act), workers in tipped occupations can deduct up to $25,000 per return of qualified tips from federal taxable income for tax years 2025 through 2028. It's an above-the-line deduction, so it stacks with the standard deduction. Voluntary cash tips, card tips, and tip-pool distributions qualify; automatic gratuities and mandatory service charges do not. The deduction phases out above $150,000 MAGI (single) / $300,000 (joint). You still pay FICA (7.65%) and, in most states, state income tax on your tips. You claim it on Schedule 1-A, and starting with 2026 W-2s your reported tips appear in Box 12, code TP. The catch: the deduction only covers tips that get reported — which makes your own daily tip records more valuable than ever.
This article is general information for tipped workers, not tax advice. Talk to a tax professional about your specific situation.
What "No Tax on Tips" Actually Is
Despite the slogan, tips didn't become tax-free. What Congress created — as IRC §224, part of the One Big Beautiful Bill Act (OBBBA) — is a federal income tax deduction for qualified tip income:
| Feature | Detail |
|---|---|
| Deduction amount | Up to $25,000 of qualified tips per return |
| Tax years | 2025–2028 (sunsets after 2028) |
| Type | Above-the-line — works alongside the standard deduction |
| Income phase-out | Begins at $150,000 MAGI (single) / $300,000 (joint); reduced $100 per $1,000 over the threshold |
| How to claim | Schedule 1-A on your federal return |
| Final rules | T.D. 10044, finalized April 2026 |
"Above the line" is the important phrase. Most servers and bartenders don't itemize — they take the standard deduction. This deduction doesn't compete with that: you subtract your qualified tips and still take your standard deduction. For a full-time server reporting, say, $20,000 in qualified tips, that's $20,000 less income subject to federal income tax.
Official IRS guidance and updates are published through the IRS Newsroom.
What Still Gets Taxed
Three things did not change, and each one catches people off guard:
- FICA still applies. Social Security and Medicare taxes — 7.65% on the employee side — are still withheld from your reported tips. Your paycheck will not suddenly stop showing tip-related withholding.
- State income tax is separate. This is a federal deduction. Whether your state taxes your tips depends on your state's own rules.
- Reporting obligations are unchanged. You're still required to report your tips, including cash. The deduction rewards reporting — it doesn't eliminate the duty to report.
Want to see what the deduction is actually worth for your numbers — your tip total, filing status, and state? Run it through the No Tax on Tips calculator.
Who Qualifies: The 74 Occupations
The deduction isn't for everyone who ever receives a tip. The final regulations (T.D. 10044, April 2026) define 74 eligible occupations, each with a Treasury Tipped Occupation Code (TTOC). The list covers the jobs you'd expect, including:
- Servers and bartenders
- Barbers and hairstylists
- Nail technicians
- Delivery drivers
- Rideshare drivers
If you work front-of-house in a restaurant or bar, you're covered. If you juggle serving with gig work — delivery or rideshare — both sides of your income can potentially involve qualified tips, but they're documented very differently (more on that below).
Qualified Tips vs. Not: The Line That Matters
Not every dollar labeled "tip" on a receipt qualifies. Here's the split:
| Counts as a qualified tip | Does NOT qualify |
|---|---|
| Voluntary cash tips | Automatic gratuities (e.g., mandatory 20% on large parties) |
| Credit and debit card tips | Mandatory service charges |
| Tips received through a tip pool |
The dividing line is voluntariness. If the guest chose to leave it, it can qualify. If the restaurant imposed it — an auto-grat on a party of ten, a built-in service charge — it's treated as something other than a tip for this deduction.
This is worth watching on your checkout slip: POS systems print automatic gratuities and service charges as a separate line item from tips, and now that separation has real tax consequences. If your restaurant leans heavily on auto-grats for large parties, a chunk of what feels like "tips" to you won't count toward the deduction. Our guide to reading your server checkout shows where each item appears on Toast, Aloha, and Micros slips.
One more nuance that helps rather than hurts: tip pool distributions qualify. If you're a barback or busser receiving tip-outs through a pool, that money is qualified tip income for you.
What's New on Your W-2 (Starting Tax Year 2026)
Beginning with the 2026 tax year, W-2 forms carry two new fields built for this deduction:
| W-2 field | What it shows |
|---|---|
| Box 12, code TP | Your total reported tips for the year |
| Box 14b | Your occupation code (TTOC) |
This makes claiming the deduction more mechanical for tips your employer knows about — card tips that ran through the POS, and cash tips you declared at checkout.
But notice the phrase tips your employer knows about. The W-2 can only reflect what entered the payroll system. Three categories routinely fall outside it:
- Cash tips never entered in the POS. If you didn't declare it, your employer can't report it — and it can't appear in Box 12.
- Tip outs. What you paid to support staff usually never touches payroll, so your W-2 number may overstate what you actually kept — while a busser's W-2 may understate what they received if pool distributions were handled in cash.
- Multi-job and 1099 gig income. Tips from a second restaurant job live on a separate W-2, and tips earned doing delivery or rideshare as an independent contractor don't come with tip-line reporting at all.
For all three, the IRS's long-standing answer applies: keep a daily tip record. IRS Publication 531 recommends tipped employees log tips received (cash and card) and tips paid out, every day they work. Under this deduction, that habit isn't just compliance hygiene — it's the documentation behind money you're legally entitled to deduct.
A Realistic Example
Take a bartender who reports $22,000 in qualified tips for 2026, files single, and has MAGI well under $150,000:
- Deduction: the full $22,000 (under the $25,000 cap) comes off federal taxable income via Schedule 1-A — on top of the standard deduction.
- Still owed: FICA (7.65%) on reported tips, plus any state income tax.
- Watch-outs: the $1,800 of auto-grats from large parties doesn't count toward qualified tips, and the tips she pays out to barbacks each shift need her own records to substantiate what she actually netted.
And remember the deduction interacts with the rest of your compensation picture. Federal law still lets employers pay a tipped cash wage as low as $2.13/hour, using a tip credit to reach the $7.25/hour federal minimum — with the employer on the hook for any shortfall, and state rules varying widely. Knowing your true hourly rate — wages plus tips, minus tip outs, divided by hours — tells you what a shift is really worth. The tip hourly wage calculator does that math for you.
What to Do Before Tax Season
- Track every shift now. Card tips, declared cash, undeclared cash, tip outs, hours. Daily, per Pub 531.
- Separate auto-grats mentally (and on paper). They pay the rent but don't feed the deduction.
- Check your W-2 when it arrives. Box 12 code TP should roughly match your own records for employer-reported tips — discrepancies are much easier to resolve with a daily log in hand.
- Mind the sunset. As written, the deduction runs through tax year 2028. The habits you build now pay off for at least the next several returns.
- Get professional advice for edge cases. Multi-state work, heavy 1099 income, or MAGI near the phase-out thresholds are exactly where a tax pro earns their fee.
The Bottom Line
No Tax on Tips is real money for tipped workers — potentially thousands of dollars a year in federal tax savings through 2028. But the deduction is only as good as your records. Employer-reported card tips will flow through automatically; the cash tips, tip outs, and gig income that make up the rest of your financial reality are on you to document. The workers who benefit most from this law will be the ones with a complete daily log.
TipScan (tipscan.app) is a free tip tracker for U.S. tipped workers. Snap a photo of your end-of-shift checkout slip and TipScan logs your tips, tip outs, and sales automatically — the kind of daily record IRS Pub 531 recommends. Free, no ads. TipScan provides record-keeping tools, not tax advice; consult a tax professional for your specific situation.