The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, created a new federal deduction of up to $25,000 per taxpayer for qualified tip income. It applies for tax years 2025 through 2028. The deduction is below-the-line (it reduces taxable income but not AGI) and is claimed on the new Schedule 1-A regardless of whether you itemize or take the standard deduction.
Because the deduction does not reduce AGI, it does not help with AGI-based limits like Roth IRA contribution eligibility, the Earned Income Tax Credit, Medicare IRMAA, or ACA premium subsidies. It only reduces the federal income tax owed on the deducted amount.
Tipped workers do still pay Social Security and Medicare (FICA) taxes on their tips. The deduction reduces only federal income tax, not payroll tax.
Who qualifies
Two requirements must both be met:
- Your occupation is on the IRS list of customarily and regularly tipped occupations. Per the statute, the IRS was required to publish this list by October 2, 2025. Common qualifying occupations include wait staff, bartenders, salon workers, personal trainers, hotel staff, taxi/rideshare drivers, and gig-economy workers in tipped roles. If your job isn’t on the list, your tips don’t qualify even if customers tip you.
- Your modified adjusted gross income (MAGI) is below the phaseout. The deduction starts phasing out at $150,000 MAGI for single filers and $300,000 MAGI for married filing jointly. Above those thresholds, the maximum deduction is reduced.
Both employees and self-employed individuals can claim it, as long as the income comes from a qualifying tipped occupation.
What counts as a qualified tip
Qualified tips are voluntary cash or charged tips received from customers in a qualifying occupation. They must be reported to your employer (for employees) or recorded on your books (for self-employed taxpayers). The deduction does not apply to:
- Mandatory service charges (auto-gratuity on parties of 6+, banquet service charges); these are wages, not tips.
- Non-cash tips (gifts, merchandise) unless explicitly defined as qualifying.
- Tips from customers in a non-qualifying occupation.
How the phaseout works
| Filing status | Phaseout begins | Maximum deduction at threshold |
|---|---|---|
| Single | $150,000 MAGI | $25,000 |
| Married filing jointly | $300,000 MAGI | $25,000 |
The exact phaseout slope is set by IRS regulations. Above the threshold, the deduction reduces. Confirm your specific phaseout amount by reading IRS instructions for the form on which the deduction is claimed (final form numbers are still being finalized as of May 2026).
How to claim it
For tax year 2025 (filing by April 15, 2026):
- W-2 employees: Your employer reports tips in Box 7 of your W-2. The deduction is claimed on the new Schedule 1-A, which flows into your Form 1040.
- Self-employed (rideshare drivers, gig-economy workers): Tips you record on Schedule C as part of gross receipts can be deducted up to $25,000 against income, subject to the same MAGI phaseout.
Keep records of which tips came from a qualifying occupation. The IRS may ask for documentation in an audit.
What this is not
The OBBBA tip deduction is a federal income tax deduction, not a tax credit. A $25,000 deduction reduces your taxable income by $25,000, not your tax bill by $25,000. For a single filer in the 22% bracket with $25,000 of qualifying tips, the actual tax savings is roughly $5,500 ($25,000 × 22%). Meaningful, but smaller than a non-tax person might assume.
The deduction also doesn’t change your state income tax treatment unless your state separately conforms to the OBBBA. Many states tax tip income normally; check your state’s revenue department guidance.
Common mistakes
Assuming all tips are exempt. Only tips from qualifying occupations on the IRS list are deductible. A tip you receive in a non-qualifying job is fully taxable.
Counting service charges as tips. A 20% auto-gratuity added to a check is a service charge, not a tip. It’s wages to the employer and does not qualify for this deduction.
Forgetting payroll tax. FICA (7.65%) still applies to your tip income. The deduction is for federal income tax only.
Skipping reporting. You still have to report tips to your employer or include them on Schedule C. The deduction doesn’t replace the reporting requirement; it just reduces the income tax owed on the reported amount.
Next action
If you work in a tipped occupation, confirm your job is on the IRS qualifying list at irs.gov before relying on the deduction. Track your tip income carefully throughout the year. When filing your 2025 return, claim the deduction on the new Schedule 1-A, which flows into Form 1040. The deduction is scheduled to expire after the 2028 tax year unless Congress extends it.