No tax on tips, explained: who qualifies, the cap and the phase-out

"No tax on tips" does not make tips tax-free. It is a federal income tax deduction, for tax years 2025 through 2028, that lets workers in tipped jobs subtract up to $25,000 of qualified tips from their taxable income when they file. Tips are still taxed in every paycheck, and Social Security and Medicare still apply to them.

How does no tax on tips work?

During the year nothing changes: tips you report to your employer are included in your wages, income tax is withheld, and so are Social Security and Medicare (7.65% together). When you file, you claim the deduction on Schedule 1-A of Form 1040. You can take it whether you itemize or take the standard deduction.

The cap is $25,000 per return. Unlike the overtime deduction, it does not double for a joint return: a married couple who both earn tips share one $25,000 limit.

How much will no tax on tips save me?

Roughly the deductible amount times your top federal tax bracket. Federal income tax saved in 2026, for workers whose income is all wages and tips, with the standard deduction:

The couple in the table has $32,000 of tips but can deduct only $25,000, the per-return cap. For higher incomes the deduction shrinks by $100 for each full $1,000 of modified adjusted gross income above $150,000 ($300,000 joint), so the single filer with $180,000 keeps $22,000 of it. A full $25,000 deduction reaches zero at $400,000 for single filers and $550,000 on a joint return.

To see the effect on your whole tax bill, use the income tax calculator; for your paycheck, the take-home pay calculator.

What counts as a qualified tip?

• Voluntary. A payment is a tip only if the customer chooses to pay it and decides the amount. Cash and card tips both count, and so do tips you receive through a tip pool.
• Not a service charge. A mandatory charge on the bill, such as an automatic 18% gratuity for large parties, is not a tip, and service charges an employer passes on to staff are generally wages (IRS tip rules).
• In a listed occupation. The tips must be earned in an occupation that customarily and regularly received tips on or before December 31, 2024. The IRS list has 71 occupations in 8 groups, from bartenders, wait staff and cooks to hairstylists, home repair workers and parking and valet attendants.

Who can claim it?

• Employees and the self-employed in a listed occupation. For the self-employed, the deduction can't be more than the net profit of the business where the tips were earned.
• A valid Social Security number for the person who received the tips.
• Married couples must file jointly.

Where your tips appear on your W-2

From the 2026 Form W-2, employers report cash tips in box 12 with code TP and the Treasury Tipped Occupation Code of your job in box 14b. Box 12 shows the cash tips you reported to your employer; box 14b shows which listed occupation they were earned in. If your W-2 has no occupation code, or the tips look wrong, ask your employer before you file.

Working overtime as well? That is a separate deduction with its own cap; the no tax on overtime calculator works it out.