Tax Planning
Preparing for ‘No Tax on Tips’: What Service Workers Should Know
A new deduction allows eligible tipped workers to deduct up to $25,000 in tips from taxable income—here’s how to tell if your job qualifies and how to claim it under recent proposed regulations.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## Overview of the “No Tax on Tips” Deduction
Passed as part of the One, Big, Beautiful Bill (OBBBA) on July 4, 2025, the **“No Tax on Tips”** provision introduces a **deduction** for “qualified tips” through 2028, allowing taxpayers to deduct up to **$25,000** annually, subject to income thresholds. ([home.treasury.gov](https://home.treasury.gov/news/press-releases/sb0258?utm_source=openai))
This deduction is available to **employees and self-employed individuals** in occupations that “customarily and regularly” received tips on or before December 31, 2024. The benefit starts with your 2025 filings. ([home.treasury.gov](https://home.treasury.gov/news/press-releases/sb0258?utm_source=openai))
## Defining “Qualified Tips” and Eligible Occupations
- **Qualified tips** include tips paid in cash or equivalent mediums (cash, check, credit/debit cards, gift cards, tangible tokens, etc.), but exclude tips from **service charges**, mandatory gratuities, and tips from illegal services. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- The regulations include a list of nearly **70 occupations** spanning eight primary categories like Beverage & Food Service, Personal Services, Hospitality, Transportation, and more. Examples include bartenders, servers, rideshare drivers, taxi drivers, etc. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- The deduction is capped at **$25,000 per taxpayer per year**, and there’s a **phaseout**: it reduces for individuals with modified AGI over $150,000 (or $300,000 for joint filers). ([home.treasury.gov](https://home.treasury.gov/news/press-releases/sb0258?utm_source=openai))
## How to Claim It & What to Do Priorities
1. **Check if your occupation appears on the published list** of “Tipped Occupation Codes (TTOCs).” If you’re unsure how your job is classified, check the proposed Treasury/IRS regulations or guidance. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
2. **Account for all your tip income accurately.** Even if you don’t receive a tip via Form W-2, Form 1099-NEC, or Form 1099-K, you must report all income to claim the deduction. Form 4137 is still relevant. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
3. **Prepare for phased-out benefits**: If your modified AGI is high, be ready for partial loss of the deduction. It phases out above $150,000 for single filers and $300,000 for joint return filers. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
4. **Stay updated on reporting requirements**: Employers and platforms will need to adjust Forms W-2 and others—when they issue statements of payments of qualified tips. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## Practical Example
- **Maria is a server**, earned $20,000 in tips in 2025, her modified AGI is $130,000. She is eligible for the full $20,000 deduction, which reduces her taxable income.
- **Ahmed is a rideshare driver**, though he’s classified as an independent contractor. Even if his platform didn’t issue a 1099-K (because of thresholds), he still reports all tip income and can claim deduction if his work qualifies.
- **Jessica operates two tip-earning roles**: as a bartender and as a DJ. They both appear on the eligible occupations list. She can combine the tips up to the $25,000 cap if her AGI is below the phaseout thresholds.
## Action Steps
- Confirm whether your occupation is covered under the proposed regulations’ list.
- Keep detailed records of tip income, form submissions, and any tip reporting platforms.
- Monitor your AGI so you know if the phaseout applies.
- When filing for 2025, ensure to include SSN, use joint filing if married (filing separately doesn’t allow the deduction).
**In summary**, the “No Tax on Tips” deduction offers real savings to many service workers—but only if you understand the eligibility criteria, track your income carefully, and file correctly. Get ahead of the learning curve so you maximize your benefit.