Background
Under the One, Big, Beautiful Bill (signed July 4, 2025), Congress introduced a new deduction which allows eligible employees and certain self-employed individuals to deduct “qualified tips” earned in occupations that were customarily receiving tips as of December 31, 2024. This applies to tax years beginning after December 31, 2024, including tax year 2025. (irs.gov)
Who Qualifies
Tipped workers need to satisfy several conditions:
- Occupation must be on IRS’s List of Occupations that Receive Tips—roles such as bartenders, waitstaff, visual artists, floral designers, or gas-pump attendants. (irs.gov)
- Tips must be voluntary, from customers or tip pools (mandatory/shared). Service charges typically not included unless customers could adjust them. (irs.gov)
- Must be reported on valid forms (W-2, 1099, or Form 4137 for self-employed). Occupation codes, reporting standards matter. (irs.gov)
The Deduction Rules & Amounts
- Maximum annual deduction: $25,000 for individuals and married filing jointly in tipped occupations. (irs.gov)
- For self-employed workers, deduction can’t exceed the net income from the trade/business in which tips were received (before this deduction). (irs.gov)
- Income phase-outs: Deduction starts phasing out for modified adjusted gross income (MAGI) over $150,000 for single, $300,000 for married joint filers. (irs.gov)
Practical Examples
- Single server, $30,000 in qualified tips, MAGI $140,000 → qualifies for full $25,000 deduction.
- Self-employed musician, earns $20,000 in tips and $10,000 non-tip self-employment income → maximum deduction is $20,000 (can't exceed tip income); net income limit matters.
- Married couple, one spouse in a tipped job, MAGI $320,000 → deduction begins phasing-out above $300,000 joint MAGI; may lose some or all deduction.
Actions to Take Now
- Check whether your occupation is on the official Tipped Occupation Code list published by IRS. (irs.gov)
- Report tips properly—use W-2, 1099, or Form 4137 if you're self-employed.
- Prepare Schedule 1-A with 2025’s tax return; instructions include worksheets and examples to help compute the deduction. (irs.gov)
- If you already filed without claiming this deduction, consider amending your return using Form 1040-X (for 2025) once regulations are finalized. (irs.gov)
Common Pitfalls to Avoid
- Assuming all tips qualify—service charges without optionality do not, and occupation must be on the list.
- Ignoring the income phase-out thresholds—you’ll lose portions or all of the deduction above those limits.
- Forgetting proper reporting forms—no report ⇒ no deduction
Outlook & Long Term Considerations
This deduction is currently authorized through 2028, per the OBBB statute. Regulations have been finalized in April 2026 to clarify eligible occupations and definition of “qualified tips.” (irs.gov)
Bottom line: If you earn tips in an eligible occupation and meet reporting, you may realize significant tax savings by deducting up to $25,000 in qualified tips. Review your occupation, report everything properly, watch your MAGI, and file with Schedule 1-A for 2025 to take advantage of this new benefit.