Qualified Tips Deduction
Who Is Eligible
- Employees who receive cash tips voluntarily given.
- Self-employed taxpayers who receive cash tips. (Note that the tips deduction reduces QBI.)
- Must have SSN valid for employment by due date of return.
- Tips must be earned in a qualified occupation as specified by the IRS as customarily & regularly receiving tips, as grouped into 8 main categories:
- 100s — Beverage & Food Service
- 200s — Entertainment & Events
- 300s — Hospitality & Guest Srvices
- 400s — Home Services
- 500s — Personal Services
- 600s — Personal Appearance & Wellness
- 700s — Recreation & Instruction
- 800s — Transportation & Delivery
- For TY2025, IRS requires taxpayers confirm that their occupation is one that customarily or regularly receives tips. For TY2026, employers or 1099 issuers will need to report specific trade and tip information according to IRS instructions.
What Tips Qualify (for TY 2025)
- For Employees
- The tips were received from customers.
- The tips were paid in a cash medium.
- The cash tips were included in the amounts reported on Form W-2.
- Either in Box 7 (Social Security Tips),
- Box 12 with Code TP, or
- Box 14 with description
- Cash tips may also be self-reported as income using IRS form 4137 Line 1c.
- For Self-Employed
- Tips received and reported on a form 1099 (only). 1099-NEC/MISC/ or /K.
- The tip must have been paid voluntarily and not required. List only those tips for which you have evidence, such as receipts, point-of-sale system reports, daily tip logs, third party settlement organization records, or other documentation of the voluntary tip.
How to Report in TaxSlayer
How to Report in TaxSlayer
- Federal → Deductions → Additional Deductions → No Tax on Tips
- Box 1: Qualified tips included on Form W2, box 7
- Enter qualified tips included on Form W-2 in box 7, or voluntarily reported by the employer in box 14 or a separate statement.
- Box 2: Qualified tips included on Form 4137, Line 1(c).
- If Form 4137 is generated, enter qualified tips included in column 1(c), which is the sum of Form W-2 screen entries for box 7, box 8, and unreported tips.
TaxSlayer uses the greater of #1 or #2 for the qualified tips deduction. If tips were received in more than
one W-2 job, enter the sums of #1 and #2.
- Box 3: Qualified tips included on Form 1099-NEC, 1099-MISC or 1099-K
- Enter qualified tips reported on Schedule C that are included on Form 1099-NEC, box 1; Form 1099-MISC, box 3; or Form 1099-K, box 1a (reduce this to the business’s net profit as shown on Schedule C, line 31, if less). For multiple businesses, figure this separately for each Schedule C and enter the sum.
Limitations
- Maximum annual deduction is $25,000. Even if both spouses get tips, the limit is $25,000 for both combined.
- MFS not eligible.
- For self-employed individuals, deduction cannot exceed net income (before this deduction) from the trade or business where tips were earned.
- Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
- For every $1,000 of MAGI above the applicable threshold, the maximum allowable deduction is reduced by $100.
- For a single filer, the deduction is completely eliminated at $400,000 MAGI.
- For married couples filing jointly, the deduction is completely eliminated at $550,000 MAGI.
