Step 1: Gather your tip income from every source
| Source | Where the tips show up |
|---|---|
| Reported to your employer | Included in wages section of Form W-2 |
| Allocated tips | Form W-2 (may need Form 4137) |
| Never reported to an employer | Calculate via Form 4137 |
| Self-employment or gig tips | Form 1099-NEC, 1099-K, or your own records |
Step 2: Report total wages and tips on Form 1040
Your total wages, including tips already reported to your employer, flow from your W-2 onto Form 1040. If you’re using Form 4137 for unreported tips, that amount gets added to your wages as well, and the form calculates the Social Security and Medicare tax due on it.
Step 3: Claim the No Tax on Tips deduction on Schedule 1-A
Enter your qualifying tips from your W-2, 1099, or Form 4137 on the new Schedule 1-A, which walks you through calculating your deduction up to the $25,000 cap. Only voluntary tips qualify (amounts a customer chooses to leave). Mandatory service charges or automatic gratuities (such as a set percentage added to large parties) aren’t tips and don’t count.
You can claim this deduction whether you itemize or take the standard deduction, and it attaches to your Form 1040 when you file. This deduction is temporary, and it’s available for tax years 2025 through 2028.
Who qualifies for the deduction (and who doesn’t)
To claim the deduction, you:
- Need a valid Social Security number
- Work in one of the occupations the Treasury Department has designated as customarily and regularly receiving tips
- Have modified adjusted gross income that falls under $150,000 if you’re single or $300,000 if you’re married filing jointly, with the deduction phasing out above those levels
Note: Married taxpayers must file a joint return to claim it at all—filing separately disqualifies you.
If your tips are self-employment income (say, from a gig or contract work), your deduction can’t exceed the net profit of the business that generated the tips. It’s also unavailable if that work is a “specified service trade or business,” which is a narrow category (fields like health, law, and consulting) that most tipped occupations don’t fall into.
Remember: Social Security and Medicare tax still apply
The No Tax on Tips deduction only reduces the federal income tax on your tips. You’ll still pay Social Security and Medicare tax on all your tip income regardless of the deduction, and your state may still tax tips even if your federal income tax is reduced.
