Qualified Tips Deduction

What is the Qualified Tips Deduction?

Beginning in 2025, if you earn voluntary tips (cash, card, or digital), you may be able to deduct up to $25,000 from your taxable income each year. This dollar limitation is maxed at $25,000 regardless of whether you file as single, head of household, or jointly with a spouse,

Both employees and self-employed individuals can qualify, as long as your job is on the Treasury’s approved list of occupations where tips are common. This list includes jobs in food and beverage, hospitality, entertainment, personal care, and more.

Who Qualifies?

To claim the deduction:

• For employees: Your reported tips must show up on Form W-2 or Form 4137
• For self-employed workers: You must track your tips income separately from other incomes.
• Your tips must be collected voluntarily.
  • To be considered voluntary, the customer must have the discretion to determine the amount (if any) will be paid. Mandatory service charges do not qualify.
• If you work in a specified service trade or business, your tips do not qualify.
  • The following are some examples of specified trades or business:
    • Services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, and brokerage services.

Income Limitations:

• This credit begins to reduce for 2025 income levels above:
  • $150,000 for non-married filers and
  • $300,000 for married filing joint filers.

What do Employers/Independent Contractors Need to do:

Employers and businesses in these industries must report tip amounts and employee occupations to the IRS and to their workers. Starting in the 2026 tax year (with forms filed in early 2027), there will be additional boxes and codes for reporting on the W-2’s and 1099’s. For 2025, no changes will happen with the forms, however it is advised to provide some sort of statement to the workers to aid them in filing their returns. On current Form W-2 there is already a box reporting tips, Form 1099 however does not have such box.

If you are an employer, employee or self-employed(with no workers), keep good records of your tip income—you or your workers may be able to claim this deduction.

Employers: Tips should still be processed through payroll and are subject to the same payroll taxes as before. The new law only affects a deduction possible on the employees’ federal income tax return.

If you or someone in your household earns tips, this new deduction could mean real savings. Contact our office at 307-577-4040 to see how it applies to you.