Step 1: find your qualified tips
Qualified tips are tips a customer chose to give, in cash or on a card, plus tips shared with you by coworkers. They have to come from a job on the IRS tipped occupations list and be reported.
- Employees: for 2025, the amount in box 7 of your W-2 (social security tips). If you reported extra tips on Form 4137, you can use that instead when it's larger.
- Self-employed: tips included on a 1099-NEC, 1099-MISC or 1099-K. If the 1099-K doesn't separate tips from fares, use the platform's records to find them. You can't deduct more than the net profit of that business.
Automatic service charges added to a bill don't count, and neither do tips you never reported.
Step 2: apply the limits
The deduction is capped at $25,000 per return. That's the same for a single filer and for a married couple, even if both spouses earn tips. It then drops by $100 for each full $1,000 of modified adjusted gross income over $150,000, or $300,000 on a joint return.
Bartender, single, $31,000 of reported tips, MAGI $162,500.
Cap: $25,000. Income over $150,000: $12,500, which is 12 full thousands.
Deduction: $25,000 − $1,200 = $23,800.
Step 3: see what it saves
The deduction lowers taxable income, so it saves your federal income tax rate on that amount.
Server, single, $52,000 total income in 2026 including $18,000 of tips.
Taxable income before: $52,000 − $16,100 standard deduction = $35,900, all in the 12% bracket or below.
Tax saved: $18,000 × 12% = $2,160.
Step 4: claim it on Schedule 1-A
Part II of Schedule 1-A is the tips deduction: lines 4 and 5 for the tips, lines 7 to 13 for the cap and the income limit. The total flows to Form 1040, line 13b. You don't need to itemize.
What doesn't change
Social Security and Medicare tax still apply to every reported tip. Your employer still withholds as before, and most states, including California, still tax tips.
Updated November 3, 2026. Sources: Internal Revenue Code §224, IRS Notice 2025-69, IRS Fact Sheet 2025-03, 2025 Schedule 1-A (Form 1040).