Tips are still fully taxable
Whether you’re an employee or self-employed, tip income counts the same as wages and must be reported to your employer and the IRS. Nothing about the new deduction changes that reporting requirement.
The new tips deduction
| Detail | Amount or rule |
|---|---|
| Maximum deduction | $25,000 per year |
| Years available | 2025-2028 |
| Deduction type | Below-the-line (reported after your adjusted gross income (AGI) is calculated) |
Source: Internal Revenue Service
Eligible workers can deduct up to $25,000 of qualified tips from their federal taxable income for tax years 2025 through 2028. The deduction phases out for modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).
What still gets taxed
The deduction applies only to federal income tax. You still owe Social Security and Medicare (FICA) taxes on 100% of your tip income, and your state may still tax tips depending on its own rules.
What counts as a qualified tip
Qualified tips must be voluntary, not negotiated or required, and paid in an occupation that customarily and regularly received tips before 2025. Mandatory service charges, like an automatic gratuity for large parties, don’t qualify as tips for this deduction.
For tax year 2026, there’s a box on your W-2 form (Box 12 Code TP) that provides the total amount of qualified tips.
Reporting tips with no employer tracking
If your employer doesn’t track your cash tips, you’re still responsible for reporting them yourself, generally using Form 4137 to calculate any Social Security and Medicare tax owed on unreported tips.
