If you received any qualified tips as part of your gross amount of payment card/third party network transactions in Box 1a, they could be eligible for a deduction and excluded from your taxable income.
“No Tax on Tips” – Qualified Tips and the New Tax BillWhat changes in 2025?
- A new tax law allows a deduction for qualified tip income.
- You can deduct up to $25,000 per return.
- Tips are still subject to Social Security and Medicare tax.
What counts as “qualified tips”?For an amount to be considered a tip (and therefore “qualified”), it must meet all four conditions:
- The payment must be voluntary,
- The customer decides the amount,
- The payment wasn’t negotiated or required in advance,
- The customer has the right to determine who receives it.
Additional guidance from the IRS is expected to further clarify what will be considered “qualified tips.”
What doesn’t qualify?
- Mandatory service charges or automatic gratuities added by a business.
- Tips from non-tipped occupations (outside the IRS eligible list).
- Tips amounts above the $25,000 deduction limit.
Income limitsThe deduction begins to phase out if your Modified Adjusted Gross Income (MAGI) is over:
- $150,000 (single)
- $300,000 (married filing jointly).
ExpirationThis deduction is available through tax year 2028.
Related Links
NOTE: This new tax bill was signed into law on July 4, 2025. The One Big Beautiful Bill Act (OBBB or OB3) is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used, but they refer to the same set of tax changes.
