The qualified tips deduction on Schedule 1-A
Updated October 2026
Section 224 of the tax code, added by Public Law 119-21, allows the deduction for tax years 2025 through 2028 when all of these are true:
The tips are voluntary. Cash or card tips the customer chooses to leave, including tips shared through a tip pool. Automatic gratuities and mandatory service charges are wages, not tips. The job is on Treasury’s list of occupations that customarily and regularly received tips on or before December 31, 2024. The tips are reported on a Form W-2, a Form 1099, another required statement, or on Form 4137 for unreported cash tips. The business is not a specified service trade or business (fields such as health, law, consulting, performing arts or financial services) if you are self-employed or work for one. You have a valid Social Security number and, if married, file a joint return. Self-employed workers cannot deduct more than the net income of the business that earned the tips.
Deduction = the smaller of qualified tips or $25,000, minus $100 for each full $1,000 of modified AGI above $150,000 ($300,000 joint). Tax saved = 2026 federal income tax without the deduction minus tax with it.
Worked example (calculator default). A single server earns $52,000, including $18,000 of reported tips. Modified AGI is under $150,000, so the full $18,000 is deductible. Without it, taxable income is $52,000 − $16,100 standard deduction = $35,900, and tax is 10% of $12,400 plus 12% of $23,500 = $4,060. With it, taxable income is $17,900 and tax is $1,240 + $660 = $1,900. Savings: $2,160, the 12% bracket rate on $18,000.
For employees, reported tips are in box 7 (Social Security tips) of Form W-2, plus any tips you reported to your employer that appear in other boxes or on a separate statement; cash tips you did not report to your employer go on Form 4137. Self-employed workers use the tip amounts on Forms 1099-NEC, 1099-K or their own records. For the income field, use your expected adjusted gross income (Form 1040 line 11); modified AGI adds back only foreign earned income and certain territory income, which most people do not have.
| Worker | Total income | Qualified tips | Return | Deduction | 2026 federal tax saved |
|---|---|---|---|---|---|
| Server, part-time | $30,000 | $10,000 | Single | $10,000 | $1,030 |
| Server, full-time (calculator default) | $52,000 | $18,000 | Single | $18,000 | $2,160 |
| Bartender, busy venue | $90,000 | $30,000 | Single | $25,000 | $5,350 |
| Married couple, one tipped spouse | $120,000 | $25,000 | Joint | $25,000 | $3,000 |
| Single, high earner in phase-out | $170,000 | $20,000 | Single | $18,000 | $4,320 |
The deduction is worth your top bracket rate on the tips deducted, so the same $20,000 of tips saves more for a higher earner, until the phase-out starts taking it away.
The $25,000 cap falls by $100 for each full $1,000 of modified AGI over the threshold. With $20,000 of qualified tips:
| Modified AGI | Single deduction | Joint deduction |
|---|---|---|
| $60,000 | $20,000 | $20,000 |
| $150,000 | $20,000 | $20,000 |
| $160,000 | $19,000 | $20,000 |
| $175,000 | $17,500 | $20,000 |
| $200,000 | $15,000 | $20,000 |
| $350,000 | $0 | $15,000 |
A single filer loses the whole $25,000 at $400,000 of modified AGI; a joint return at $550,000.
It is a federal income tax deduction only. Social Security and Medicare taxes (7.65% for employees, 15.3% self-employment tax) still apply to every tip dollar, and states decide for themselves whether to follow it. Because the deduction comes after adjusted gross income, it does not lower AGI-based figures such as the earned income credit, IRMAA, student loan payments under income-driven plans, or many state taxes that start from federal AGI. The calculator does not model the self-employed net-income limit, the specified-service exclusion, or credits. If you are self-employed, work in a field that may be a specified service business, or have unreported cash tips from 2025, a tax professional or the Schedule 1-A instructions can settle what qualifies.
Counting service charges. An 18% automatic gratuity on a large party is not a qualified tip. Skipping Form 4137. Cash tips that never reached your employer’s records must be reported, with payroll tax, before they can be deducted. Filing separately. Married people who file separate returns cannot claim it. Expecting a smaller paycheck tax. Employers still withhold on tips; the saving arrives when you file, unless you adjust your W-4. Using total income as the deduction. Only the tip portion is deductible, never your hourly wages.