The One Big Beautiful Act of 2025 introduces a significant tax change for individuals who receive tips. Section 70201 created a deduction that makes a large portion of the earned tips effectively tax-free. 

Qualified Tips Up to $25,000 Can be Deducted 

Starting with the tax year 2025, individuals can deduct up to $25,000 per year in qualified tips from their taxable income. Qualified tips are defined by the law as: 

• “Cash tips” which includes those that are paid directly by customers in cash or card charged, and those received by employees under any tip-sharing arrangement. 

• Amount received in an occupation that customarily and regularly received tips as of December 31, 2024 (such as restaurants, salons, bars, spas, etc.). The IRS will soon release an official list of such occupations. 

• Voluntary, customer-determined payments, and without any consequence in the event of non-payment.  Mandatory service charges or negotiated amounts do not qualify. 

Exclusions: The law does not allow deduction for tips received in a specified service trade or business (SSTB), such as those in law, health, accounting, consulting, etc. Self-employed individuals in an SSTB are also not eligible. 

Important: These tips must be properly reported (via Form 1099 for self-employed, Form W-2, Form 4137, or other IRS tax records) in order to claim the deduction. 

 
Income Phase Out 

At higher income levels, this deduction begins to phase out which is reduced by $100 for every $1,000 above the applicable threshold: 

• $150,000 Modified AGI for single filers  

• $300,000 Modified AGI for married filers  

Taxpayer Eligibility 

This deduction is available to individuals whether you choose to itemize or non-itemize your deductions. The taxpayers must: 

• Indicate their Social Security Number in their return 

• If they are married, they must file jointly to claim the deduction 

Additional Limit for the Self-Employed 

The deduction for the tips received through your own business are limited to the extent your business’ net income meaning it cannot exceed your business earnings. 

 
Law Expiration 

Unless extended, the tip deduction can only be availed until the tax year 2028. 

Want to learn more?  

You may want to consult and work with 1099 Accountant – We offer online bookkeeping, online advisory services and online tax and accounting services. We offer reasonable rates. We only work with independent contractors, freelancers, and one-person business. We work with locum tenens from California to New York City and everywhere in between. Yes, even Hawaii!  

Contact us toll-free (855)529-1099 or make an appointment for a free consultation. Contact Us