How does “no tax on tips” work?
Starting in 2025, there is a new IRS rule that may allow you to deduct a portion of your tip income to reduce the amount of taxes you pay. To qualify, you must:
- Have a valid Social Security Number
- Work in a job where tips are customary, including bartending or food service, hospitality, wellness, transportation, or events and entertainment
- Have evidence of your tipped income, either included on your W2 or 1099 from your employer, or through your own record keeping
In addition:
- The maximum deduction allowed is equal to the amount of qualified tip income received, up to $25,000
- To be qualified tip income, the tip must have been voluntarily paid by the customer and cannot include automatic gratuities
- You are legally required to report all of your tipped income to the IRS, including cash tips
- You may still have to pay payroll taxes or state and local taxes on tipped income
If a large portion of your income is from tips, we recommend using our Virtual VITA/File with Help option to make sure you get the most money back this filing season. Your tax specialists will need to see documents that include your tips, either in your W2 or 1099, or included in your own personal log.