No Tax on Tips: Complete 2026 Guide
The "no tax on tips" law, formally IRC Section 224, allows W-2 employees in customarily tipped occupations to deduct up to $25,000 of qualified tip income from their federal income tax. Enacted as part of the One Big Beautiful Bill Act (OBBBA), the deduction took effect January 1, 2025 and runs through December 31, 2028. It is an above-the-line deduction, meaning you can claim it even if you take the standard deduction. Below is everything you need to know to claim it correctly for tax year 2026.
What is the no tax on tips law?
IRC Section 224 created a new above-the-line deduction for qualified tips received by employees in customarily tipped occupations. "Above the line" means the deduction reduces your adjusted gross income (AGI), and you do not need to itemize to claim it. The deduction appears on the new Schedule 1-A, which was introduced alongside the overtime and senior bonus deductions from the same law.
The deduction applies only to federal income tax. It does not reduce Social Security tax, Medicare tax, or any state income tax (unless a state chooses to conform). This distinction matters: even with the full deduction, you still owe FICA on every dollar of reported tips.
Who qualifies for the tips deduction?
To claim the Section 224 deduction, you must meet all of the following requirements:
- W-2 employee: You must be an employee who receives a W-2. Independent contractors (1099-NEC) and self-employed individuals do not qualify.
- Customarily tipped occupation: Your occupation must be one where tipping is customary, as defined under IRC Section 45B. This includes servers, bartenders, hairstylists, taxi drivers, hotel housekeepers, and similar roles.
- Tips properly reported: Tips must be reported to your employer. For cash tips, use Form 4070 or your employer's electronic reporting system.
- Filing status: You must file as single, head of household, or married filing jointly. Married Filing Separately filers are excluded entirely.
- MAGI under the elimination point: Your modified adjusted gross income must be below the level where the phase-out fully eliminates the deduction (more on this below).
Starting in TY 2026, your employer must report your qualified tips using W-2 Box 12 Code TP. This code tells the IRS (and you) the exact amount eligible for the deduction.
How much can you deduct?
The maximum deduction is $25,000 per taxpayer per year. If you earned less than $25,000 in qualified tips, your deduction equals your actual qualified tip amount. If you earned more, the excess is taxed normally.
For married couples filing jointly where both spouses work in tipped occupations, each spouse can claim up to $25,000, for a combined household maximum of $50,000.
Example 1: Server with $20,000 in tips
Maria is a single filer who earned $32,000 in base wages and $20,000 in qualified tips during 2026. Her MAGI is $52,000, well below the $150,000 phase-out threshold. She deducts the full $20,000 on Schedule 1-A. Her taxable income drops from $35,900 (after the $16,100 standard deduction) to $15,900. At the 22% bracket, this saves her roughly $4,400 in federal income tax.
Example 2: Bartender hitting the cap
James earned $40,000 in qualified tips and has a MAGI of $80,000. His tips exceed the $25,000 cap, so he deducts $25,000. The remaining $15,000 in tips is included in taxable income as usual.
What counts as qualified tips?
Qualified tips include any gratuity received in a customarily tipped occupation, regardless of whether the customer paid in cash, credit card, or digital payment. The key requirement is the occupation test, not the payment method.
- Cash tips: Qualify if properly reported to your employer
- Credit card tips: Qualify; these are already captured in payroll records
- App-based tips: Qualify for W-2 employees in tipped occupations (e.g., a valet using an app)
- Service charges: Mandatory service charges distributed to employees are treated as wages, not tips, and do not qualify
- Self-employment tips: Do not qualify. The deduction is limited to W-2 employees.
For more detail, see our glossary entry on qualified tips and Do Cash Tips Qualify for the Tips Deduction?.
How the MAGI phase-out works
The tips deduction phases out for higher earners. If your modified adjusted gross income exceeds the threshold for your filing status, the maximum deduction is reduced by 10% of the excess:
- Single / Head of Household: Phase-out begins at $150,000 MAGI
- Married Filing Jointly: Phase-out begins at $300,000 MAGI
- Married Filing Separately: Not eligible for the deduction at any income level
The formula: Reduction = 10% x (MAGI - threshold). Your available deduction is the lesser of your qualified tips or ($25,000 minus the reduction). The deduction cannot go below zero.
Example 3: Phase-out in action
Alex is a single filer with $25,000 in qualified tips and a MAGI of $200,000.
Excess over threshold: $200,000 - $150,000 = $50,000
Reduction: 10% x $50,000 = $5,000
Available deduction: $25,000 - $5,000 = $20,000
At the 22% marginal rate, Alex still saves roughly $4,400 in federal income tax.
For a full walkthrough with more scenarios, see How the $25,000 Tips Cap Phases Out. You can also run your own numbers with the no tax on tips calculator.
How to claim it on Schedule 1-A
The tips deduction is reported on the new Schedule 1-A, which was introduced for tax year 2025. Here is the process:
- Gather your W-2(s). For 2026, look for Box 12 Code TP, which shows your qualified tip amount.
- Enter the qualified tip amount on Schedule 1-A, Line 1.
- Apply the $25,000 cap. If your qualified tips exceed this amount, enter $25,000.
- Calculate any MAGI phase-out reduction and subtract it.
- The result flows to Schedule 1, then to Form 1040 Line 10, reducing your AGI.
If you are filing for tax year 2025 (the transitional year), IRS Notice 2025-69 provides alternative reporting guidance since the W-2 Code TP was not yet mandatory. You can use pay stubs, employer statements, or Form 4070 records to substantiate your qualified tips.
Use the Schedule 1-A deduction calculator to see how tips, overtime, and the senior bonus deduction combine on this form.
Does the tips deduction reduce FICA?
No. The Section 224 deduction is an income tax deduction only. Social Security tax (6.2%) and Medicare tax (1.5%) still apply to all reported tip income, just as they did before the law. If you earn $25,000 in tips, you will still owe $1,550in Social Security tax and $363 in Medicare tax on that amount (assuming you are below the Social Security wage base of $184,500).
This is a common point of confusion. For a detailed explanation, read Does No Tax on Tips Reduce FICA?.
Married Filing Separately exclusion
If you are married and file separately, you cannot claim the tips deduction at all. This is not a phase-out or a reduced amount; IRC Section 224 explicitly excludes the Married Filing Separately status. There are no exceptions.
Couples where one or both spouses work in tipped occupations should evaluate whether the tips deduction (plus any overtime or senior bonus deductions) makes filing jointly more beneficial than filing separately. In most cases, the $25,000deduction per spouse significantly favors a joint return.
When does the law expire?
The tips deduction is temporary. It applies to tax years beginning on or after January 1, 2025 and before January 1, 2029. That gives it a four-year window: tax years 2025, 2026, 2027, and 2028. Unless Congress passes new legislation to extend or make it permanent, the deduction will no longer be available starting in tax year 2029.
For the full timeline, including retroactive application for 2025, see When Does No Tax on Tips Start?.