No tax on tips, explained

The final regulations set three conditions. The tip has to be paid in cash or an equivalent, which the IRS describes as including card and electronic payment. It has to reach you either from the customer directly or, for an employee, "through a mandatory or voluntary tip-sharing arrangement", so a tip pool or a tip-out to the bar still counts. And it has to be "paid voluntarily by the customer and not be subject to negotiation".

That last condition is what excludes automatic service charges. A large-party gratuity the customer cannot decline or change is not a qualified tip; the regulations carve out service charges "unless the customer has an option to disregard or modify the service charge". Publication 15-T states the same rule in the employer's language: "Mandatory service charges added to the bill are not qualified tips." If your restaurant adds 20 percent to every check of six or more, the part that comes to you from that charge is wages, not a deductible tip.

Section 224 only covers tips received "in an occupation which customarily and regularly received tips on or before December 31, 2024", and it fell to Treasury to say which occupations those are. The final regulations, T.D. 10044, were published in the Federal Register on April 13, 2026 and took effect on June 12, 2026, after more than 300 public comments and a hearing. They list more than 70 occupations and give each one a three-digit Treasury Tipped Occupation Code.

The codes are grouped into eight families: beverage and food service (the 100s), entertainment and events (200s), hospitality and guest services (300s), home services (400s), personal services (500s), personal appearance and wellness (600s), recreation and instruction (700s), and transportation and delivery (800s). The final version added visual artists and floral designers to personal services and gas pump attendants to transportation and delivery. The list is long and specific enough that it is worth checking your own title against the published version rather than assuming from the category name.

Starting with tax year 2026 the code matters on paper too: Publication 15 requires employers to furnish statements "showing cash tips received and the Treasury Tipped Occupation Code(s) of the tip recipient", so the occupation should arrive on your W-2 rather than being something you argue about later.

The deduction is capped at $25,000 per return. This is the detail most often reported wrong: unlike the overtime deduction, which is $12,500 single and doubles to $25,000 on a joint return, the tips cap is a flat $25,000 whatever your filing status. A married couple where both spouses work tipped jobs share one cap between them.

Then the phase-out. The capped amount falls by $100 for every full $1,000 of modified adjusted gross income above $150,000, or $300,000 on a joint return. Partial thousands do not count, so a dollar over the threshold costs nothing until it becomes a whole thousand. Carried to its end, the deduction reaches zero at $400,000 of MAGI for a single filer and $550,000 on a joint return. None of these amounts are indexed for inflation.

You do not need to itemize. The IRS states the deduction "is available whether you itemize or take the standard deduction", and it is claimed on Schedule 1-A of Form 1040, stacking on top of the standard deduction.

The conditions are the same shape as the overtime deduction's. You need a Social Security number valid for employment, on the return. If you are married you must file a joint return, which makes married filing separately a flat zero at any income. Section 224 also excludes tips received in the course of a specified service trade or business, borrowing that term from section 199A(d)(2). That exclusion is aimed at self-employed professionals rather than at restaurant, salon, or hotel employees.

• FICA. Publication 15 is explicit: "Tips are still generally subject to both the employer share and employee share of social security tax and Medicare tax if the tips received are $20 or more per month." Self-employment tax applies to self-employed tip income the same way. The deduction touches federal income tax and nothing else.
• State income tax. This is a federal deduction. States write their own rules and most have not matched it, so state tax where it applies generally still falls on the full tip amount.
• Reporting your tips. The deduction runs on tips reported on a W-2 or on Form 4137, not on cash that never reached a statement. Reporting obligations are unchanged by the deduction.
• Exact figures. Every number here is a planning estimate on published 2026 tables, computed from wages and tips alone. Real returns carry other adjustments, deductions, and credits that move both MAGI and the tax a deduction saves.