The standalone No Tax on Tips Act, S. 129, passed the Senate in May 2025, but it is not the law that currently provides the federal tip deduction. That deduction was enacted later in Public Law 119-21. It lets eligible taxpayers deduct certain tips from federal taxable income for tax years 2025 through 2028; it does not make all tips tax-free or end reporting and payroll-tax obligations.
Which “No Tax on Tips” law applies now?
The name can refer to two different things. S. 129 was a standalone bill that passed the Senate on May 20, 2025. The deduction taxpayers can claim now was enacted as section 70201 of Public Law 119-21, the One, Big, Beautiful Bill Act, and is codified in Internal Revenue Code section 224. The IRS explains the current deduction in its March 5, 2026 guidance, “What the ‘No Tax on Tips’ deduction means for you.”
| Reference | What it is | What it means for taxpayers |
|---|---|---|
| S. 129 | A standalone bill passed by the Senate in May 2025 | Legislative history; it is not the current source of the deduction. |
| Public Law 119-21, section 70201; Internal Revenue Code section 224 | The enacted federal law establishing the deduction | The current rules for eligible tips, subject to the law and IRS guidance. |
What the deduction does—and what it does not do
Section 224 allows a deduction for qualified tips for tax years beginning after December 31, 2024, and does not allow the deduction for tax years beginning after December 31, 2028. A deduction reduces the income on which federal income tax is calculated; it is not a tax credit or an exemption that removes tips from income reporting. The value to an individual depends on their circumstances, so the deduction amount is not the same thing as tax saved.
Tips generally remain reportable and subject to Social Security and Medicare taxes. The federal deduction also does not settle any separate state or local tax treatment; check the rules for the relevant jurisdiction.
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The Council of Economic Advisers estimated an average annual take-home-pay increase of $1,300, a figure reported in the Treasury and IRS final-rule materials. It is an estimate, not a guaranteed amount, an IRS finding of actual results, or a prediction for any one taxpayer.
Which tips and jobs can qualify?
In general, qualified tips are voluntary cash or charged tips from customers, including tips an employee receives through a tip-sharing arrangement, if the statutory and regulatory requirements are met. An amount labeled a gratuity is not automatically a qualified tip: a required service charge, for example, does not qualify merely because it appears on a bill.
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The occupation must be on the IRS’s final list of occupations that customarily and regularly received tips on or before December 31, 2024. The list covers more than 70 occupations and includes titles, descriptions, examples, and occupational codes. Treasury and the IRS issued the final regulations on April 10, 2026; they took effect June 12, 2026. Check the current IRS occupation list and the regulations rather than assuming a job qualifies because customers sometimes tip people doing it.
| Work or payment | How to assess it |
|---|---|
| Employee tips, including tips received through tip sharing | May qualify if the tips, occupation, reporting, and other requirements are satisfied. |
| Tips earned by a self-employed worker | May qualify if the requirements are met; the deduction is limited to net income before this deduction from the trade or business where the tips were earned. |
| Overtime pay | Overtime wages are not tips and are not covered by this tip deduction. Evaluate any tips separately. |
| Required service charge | Not automatically a qualified tip; apply the IRS definitions and regulations to the payment. |
How much can you deduct, and who can claim it?
The maximum deduction is $25,000 per year. It phases out when modified adjusted gross income is above $150,000, or above $300,000 for married taxpayers filing jointly. Those amounts are thresholds, not a promise that every eligible taxpayer can deduct the full maximum; the applicable phaseout and other eligibility rules matter.
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- Married taxpayers must file jointly to claim the deduction.
- The taxpayer—or the taxpayer’s spouse, if the spouse received the qualified tips—must have a Social Security number valid for employment.
- You may claim the deduction whether you itemize deductions or take the standard deduction.
- Self-employed taxpayers remain subject to the occupation and reporting requirements, as well as the limit tied to net income from the business in which the tips were earned.
How to claim the deduction on a 2025 federal return
For tax year 2025 returns filed in 2026, claim the deduction on Schedule 1-A, Additional Deductions, attached to Form 1040, Form 1040-SR, or Form 1040-NR, as applicable. The IRS published the schedule and related instructions in March 2026. Use the instructions for the tax year on the return you are filing.
For 2025, information returns did not separately report all qualified cash tips. The 2025 Forms W-2, 1099-NEC, 1099-MISC, and 1099-K were not changed to include a separate report of every such amount. IRS Notice 2025-69 explains how individuals can determine qualifying amounts using existing statements and records, including reported tips. Do not stop reporting tips on the assumption that the deduction replaces ordinary reporting requirements.
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What records should you keep?
Keep records that support the tips you received and reported, such as employer statements and other relevant records. IRS guidance on the 2025 transition gives a daily tip log as an example of evidence that can substantiate an amount. A logbook is optional, not a prerequisite to the deduction, and does not by itself establish that a particular tip or occupation qualifies. Keep records consistent with the facts you use to complete Schedule 1-A.
What if you already filed your 2025 return?
If you filed before the final occupation rules and later determine that you may qualify, an amended return may be appropriate, but eligibility depends on your facts. The IRS directs taxpayers to the Schedule 1-A instructions and Form 1040-X instructions for the amendment process. Review those instructions and your records before deciding whether to amend.
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