The no tax on tips deduction for 2025 was created by the One Big Beautiful Bill Act (OBBBA) and applies retroactively starting January 1, 2025. The IRS also announced that 2025 is a transition year—meaning the deduction works differently in 2025 than it will in later years.
If you’re a tipped worker (or you advise one), the key is understanding what qualifies, what documentation is acceptable in 2025, and what the IRS is (and isn’t) requiring employers and payors to do this year.
For tax years 2025 through 2028, taxpayers who work in customarily tipped occupations may be able to deduct qualifying cash tips ("qualified tips") from taxable income—up to $25,000 per year (subject to a phaseout once modified adjusted gross income (MAGI) exceeds $150,000, or $300,000 for joint filers).
Treasury/IRS proposed regulations list 68 customarily tipped occupations that qualify for the deduction (this list can be updated as guidance evolves).
If you want the “who qualifies” breakdown, start here: IRS list for the OBBBA tips deduction: do you qualify?
The statute and IRS guidance are clear on one central requirement: to take the deduction, the qualified cash tips must be included on qualifying payee statements (for example, Form W-2) or reported by the taxpayer on Form 4137 (as applicable in 2025).
Clarification: In IRS terminology, “cash tips” generally includes tips paid in cash and tips paid by card/electronic methods (often called “charged tips”), including tip-sharing distributions. It does not include mandatory service charges or noncash items.
Important 2025 reality: the IRS did not revise 2025 Forms W-2, 1099-NEC, or 1099-K to include a dedicated “qualified tips” amount. Because of that, the IRS created special 2025 methods for determining the qualified tip amount. See IRS Notice 2025-69.
For 2025 only, employees may calculate the amount of qualified tips in one of the following ways:
Employees may also add any amount of unreported tips they included on Form 4137, line 4.
Marco is a bartender. During 2025, Marco reports $18,400 in tips to his employer through tip reports. Marco’s 2025 Form W-2 reports $192,000 in box 1 and $14,200 in box 7. Marco also reports $3,600 of additional unreported tips on Form 4137, line 4, and includes that amount in income.
For 2025, Marco may use either the $14,200 in W-2 box 7 or the $18,400 reported to the employer (depending on which 2025 method he chooses), and he may also include the $3,600 from Form 4137 in determining qualified tips.
For 2025, payors of independent contractors—and third-party settlement organizations (TPSOs) such as PayPal, Venmo, and certain booking/ordering platforms—are not required to provide a Form 1099 that separately identifies tips.
So for 2025, independent contractors may calculate qualified tips using:
Nina is a self-employed tour guide (sole proprietor). In 2025, she receives $6,750 in tips paid through an online booking platform (a TPSO). She receives a Form 1099-K showing $58,500 of total payments, but the 1099-K does not separately identify tips. Nina keeps a daily log showing the date, customer, and tip amount received. Because she has tip logs substantiating the $6,750, she may use that figure in determining qualified tips for 2025.
One practical benefit: This 2025 approach can allow independent contractors to substantiate and claim properly documented tips even when there is no separate “tips” breakout on a 1099. Documentation is the make-or-break point.
The tips deduction statute includes a limitation that tips earned in a specified service trade or business (SSTB) are not eligible. SSTBs here are generally defined in the same way as under the qualified business income (QBI) rules (e.g., health, law, accounting, consulting, financial services, performing arts, athletics, and similar fields).
However, the IRS determined additional guidance is needed to apply this rule for tipped workers and is delaying enforcement of the no-SSTB rule until January 1 of the first calendar year after final regulations are issued. Practically, that means:
This transition relief is described in IRS Notice 2025-69 and makes qualification easier in the short term: focus first on being in a customarily tipped occupation and having defensible reporting/documentation.
If you want the higher-level planning context, read: OBBBA no tax on tips (2025–2028).
Schedule a Free Tax Strategy Session if you want us to review eligibility, documentation, and how to report this cleanly for 2025.