OBBBA · IRC § 224 · TY 2025–2028
Estimate your federal income tax savings from the OBBBA qualified tip income deduction. Includes phase-out for MAGI over $150,000. FICA and state taxes still apply.
Want the full rules, examples, edge cases, and planning context behind this calculation? Read the companion guide.
Read the No Tax on Tips Guide →The OBBBA tip income deduction (IRC § 224) lets eligible workers deduct up to $25,000 of qualified tip income from federal income tax for tax years 2025 through 2028. This reduces your income tax only. Social Security, Medicare (FICA), self-employment taxes, and most state income taxes still apply to tip income in full. The deduction phases out starting at $150,000 MAGI for single filers ($300,000 for married filing jointly).
| Item | Value | Status |
|---|---|---|
| IRC section | §224 | Confirmed |
| Governing form | Schedule 1-A (Form 1040) | Confirmed |
| Maximum deduction — single/HOH | $25,000 | Confirmed |
| Maximum deduction — MFJ (per qualifying spouse) | $25,000 each | Confirmed |
| Phase-out threshold — single/HOH | $150,000 MAGI | Confirmed |
| Phase-out threshold — MFJ | $300,000 MAGI | Confirmed |
| Phase-out rate | $100 reduction per $1,000 over threshold | Confirmed |
| Phase-out elimination — single/HOH | ~$400,000 MAGI | Confirmed |
| Phase-out elimination — MFJ | ~$550,000 MAGI | Confirmed |
| Eligible workers | Tipped employees in food service, hospitality, personal care | Confirmed |
| FICA/SECA treatment | Not reduced — income tax deduction only | Confirmed |
| MFS filing status | Not eligible | Confirmed |
| OBBBA sunset | December 31, 2028 (TY 2025–2028) | Confirmed |
| State conformity | Varies — no federal mandate | Provisional |
Under the One Big Beautiful Bill Act, eligible workers can deduct qualified tip income from their federal taxable income using IRC § 224. The deduction is claimed on Schedule 1-A of Form 1040.
Start with your total voluntary tip income for the year. The maximum is $25,000. If you are self-employed, your deduction also cannot exceed your net income from the business where tips were earned. Mandatory service charges do not count.
If your MAGI exceeds $150,000 (single, head of household) or $300,000 (married filing jointly), the deduction is reduced. For every $1,000 of MAGI above the threshold, the maximum $25,000 deduction is reduced by $100. The deduction reaches zero at $400,000 (single) and $550,000 (MFJ).
Multiply your final deductible amount by your federal marginal income tax rate. A server in the 22% bracket with $20,000 in qualifying tips and MAGI below the phase-out threshold saves $4,400 in federal income tax.
FICA taxes (Social Security 6.2% + Medicare 1.45%) still apply to tip income for W-2 employees. Self-employed tipped workers still pay SECA (15.3% on 92.35% of net earnings). Most state income taxes also still apply. This deduction is a federal income tax deduction only.
Tips must be received in an occupation that customarily and regularly received tips on or before December 31, 2024. The IRS publishes the official list of qualifying occupations.
The IRS published a list of 68 qualifying occupations. Common qualifying occupations include food and beverage servers, bartenders, hotel staff, valet attendants, taxi and rideshare drivers, salon and spa workers, casino dealers, caddies, and digital content creators (where tipping was an established practice before December 31, 2024). The occupation must have had a recognized tipping culture before the OBBBA was enacted.
Workers in a Specified Service Trade or Business (SSTB) under IRC § 199A are excluded. This affects self-employed workers in fields such as health, law, accounting, financial services, consulting, and performing arts. An employee whose employer operates an SSTB is treated as working in an SSTB for purposes of this deduction.
If you are unsure whether your occupation qualifies, verify against the IRS OBBBA provisions page before claiming the deduction.
Both cash tips and credit card tips qualify for the §224 deduction if they are voluntary and the customer had genuine freedom to determine the amount. The tip type does not affect eligibility.
One practical difference: cash tips are received directly. Credit card tips are processed by the employer, who passes them to the employee (minus any credit card processing fee under IRS rules). The net amount received is the qualifying tip income.
The compliance risk is higher for cash tips. Unreported cash tips are subject to the same income tax rules as any other wages. Employees are required to report all cash tips of $20 or more per month to their employer using Form 4070. Failing to report tips does not reduce the §224 deduction — it eliminates eligibility entirely for the unreported amount and creates separate tax liability.
Only voluntary tips qualify for the §224 deduction. A service charge is not a tip.
The IRS distinguishes tips from service charges by four factors: (1) the payment must be voluntary, (2) the customer must have unrestricted freedom to determine the amount, (3) the payment must not be subject to employer negotiation, and (4) the customer must determine who receives the payment. If any of these conditions are not met, the payment is a service charge — even if it is called a "tip" on a menu or receipt.
Service charges are wages to the employer, not tips to the employee. They are taxable as regular income and are not eligible for the §224 deduction.
The phase-out reduces the maximum $25,000 deduction for higher-income filers. It does not eliminate the deduction abruptly. The reduction is gradual: $100 for every $1,000 of MAGI above the threshold.
In this example, the phase-out reduces the $25,000 cap to $22,500. Since the filer only has $18,000 in tips, the phase-out has no practical effect here. The phase-out only matters when tip income is close to $25,000 and MAGI is above the threshold.
IRC §224 is enacted law. Most of its rules are confirmed. The key pending item is the final qualifying occupation list.
Both deductions use the same MAGI phase-out thresholds. The caps and eligibility rules differ.
This server saves $3,960 in federal income tax. Tips are still reported on Form W-2 Box 7 and subject to FICA. The deduction is claimed on Schedule 1-A. For tax year 2025, the IRS granted employers penalty relief under Notice 2025-69. Employers may report qualifying tip income using Box 7, Box 14, or allow employees to use personal logs or paystubs as the basis. For tax year 2026 and beyond, employers must use the updated W-2 reporting codes (Code TP) for qualified tips.
At LMN Tax Inc., the most common error we see with this deduction involves FICA. Clients told they have "no tax on tips" sometimes assume their W-2 Box 1 wages will drop to zero. They will not. Tips remain fully subject to Social Security and Medicare withholding. For a server earning $20,000 in tips, the FICA bill is still $1,530. The income tax savings is separate and real, but it does not eliminate payroll tax liability.
The SSTB exclusion catches self-employed clients off guard. A hair stylist who is employed at a salon qualifies for the deduction. One who operates their own independent salon practice may be excluded if the IRS classifies that business as a personal services SSTB. We verify occupation and entity structure before claiming for any self-employed client. The employee versus self-employed distinction matters more for this deduction than for most others.
For documentation, TY 2025 has transitional relief under Notice 2025-69. Clients can use personal daily tip logs, pay stubs, or any employer-provided record. Starting TY 2026, W-2 Box 12 Code TP is required by the employer. We advise all tipped clients to maintain a daily tip log regardless of year, since the IRS can request documentation and informal logs are harder to reconstruct after the fact.
The employer reporting requirements differ between TY 2025 and TY 2026. Use the table below to understand what to expect on your W-2.
| Item | TY 2025 | TY 2026+ |
|---|---|---|
| Employer W-2 reporting of qualified tips | Box 14 (voluntary) | Box 12, Code TP (required) |
| IRS transitional relief | Yes — any employer statement acceptable | No — Code TP required |
| Self-employed reporting | Schedule SE / Form 1040 as usual | Same — no Box 12 equivalent for SE |
| Schedule 1-A required | Yes | Yes |
For TY 2025, the IRS granted transitional relief: employers may use Box 14 voluntarily. Employees who cannot obtain a Box 14 breakdown should use pay stubs and employer tip records to calculate their qualified tip income. Starting TY 2026, employers must report qualified tip income in W-2 Box 12 using Code TP.
The OBBBA tip deduction reduces federal income tax only. Payroll taxes are unchanged.
W-2 Employees: Tips remain subject to Social Security tax (6.2%) and Medicare tax (1.45%). Your employer withholds the employee share. Tips are reported on Form W-2 Box 7 and any unreported tip income is reported on Form 4137. Social Security tax applies up to the wage base ($176,100 for TY 2025, $184,500 for TY 2026).
Self-Employed: Self-employment tax (15.3% on 92.35% of net earnings) still applies to tip income. The deduction does not reduce SE tax. You may deduct 50% of SE tax from gross income as an above-the-line deduction, which is separate from and independent of the tip deduction.
State Income Tax: As of March 2026, many states have not conformed to the federal tip income deduction. If your state has not enacted a matching provision, tip income remains fully taxable at the state level. Verify your state's conformity status before assuming state savings.
Federal Withholding on Tips: IRS Publication 15 section 7 treats tips as supplemental wages for withholding purposes. Employers may apply the 22 percent flat supplemental rate or aggregate tips with regular wages. The OBBBA deduction applies at filing - it does not change the employer's withholding. To estimate federal withholding on a specific tip payout, see the Bonus Tax Calculator and the Bonus Tax Withholding Guide, which share the same supplemental wage framework.
If your occupation appears on the IRS qualified occupations list and your MAGI is below the phase-out threshold, claim the deduction on Schedule 1-A when filing your TY 2025 return.
If your MAGI is close to or above $150,000 (single) or $300,000 (MFJ), use this calculator to determine your reduced deductible amount before filing.
If you also worked overtime in TY 2025 or TY 2026, you may claim both the IRC § 224 tip deduction and the IRC § 225 overtime deduction on the same Schedule 1-A return. Use the No Tax on Overtime Calculator to estimate your combined savings.
For self-employed workers, verify your occupation is not an SSTB and confirm your net business income equals or exceeds your tip income. For professional tax preparation, contact LMN Tax Inc. or use the 1099 Tax Calculator to estimate your full self-employment tax picture.