The “No Tax on Tips” provision is part of the One Big Beautiful Bill Act, signed into law on July 4, 2025. It allows eligible workers to deduct up to $25,000 in tip income from their federal taxable income—helping reduce the amount of taxes owed. NOTE: Married Filing Separately disqualifies users from claiming this deduction.
💡 Important: This is a deduction, not a full exemption. You still report your tips, but you may owe less in taxes.
What Counts as Tip Income?
According to IRS rules, all of the following are taxable tips:
- Cash tips given directly by customers
- Charged tips paid out by an employer from credit/debit cards
- Shared or pooled tips (e.g., tip-splitting arrangements)
- Non‑cash tips (gift cards, tickets, passes — reported at fair market value)
If you receive $20 or more in tips in a month, you must report them to your employer.
How Tip Income Appears on Your W‑2
✅ Box 7 — Social Security Tips
Box 7 shows social security tips that you reported to your employer.
These amounts are used in calculating the new “No Tax on Tips” deduction starting in 2025.
✅ Box 8 — Allocated Tips
Box 8 shows allocated tips — tips your employer assigned to you (often based on tip‑pooling rules). Box 8 amounts are automatically included in total income when preparing your return. However, they do require reporting on Form 4137.
Reporting Unreported Tips (Form 4137)
If you did not report your tips to your employer as required, you must:
✅ 1. Add unreported tips to wages (Box 1)
Add unreported tips to the amount in Box 1 of the W‑2.
✅ 2. Calculate Social Security & Medicare tax on Form 4137
Unreported tips require filing Form 4137, which the program uses to calculate the additional SS/Medicare taxes owed.
✅ 3. Penalty reminder
Failure to report tips to an employer may result in a penalty equal to 50% of SS/Medicare tax due on those tips.
Navigation:
Federal → Other Taxes → Social Security and Medicare Tax on Unreported Tip Income (Form 4137) [
New for 2025–2028: The “No Tax on Tips” Deduction
The One Big Beautiful Bill Act (2025) introduced a deduction allowing eligible workers to deduct up to $25,000 ($50,000 for joint filers) of qualified tip income.
✅ Who Qualifies?
- Workers in jobs that regularly receive tips
- Tips must be voluntary (not mandatory service charges)
- Tips must be reported on W‑2, 1099-NEC, 1099-K, 1099-MISC or Form 4137
- Income limits apply ($150k single / $300k joint)
✅ How to Calculate the Deduction
- Start with Box 7 (Social Security tips) or tips reported on IRS Forms 4070
- Add unreported tips from Form 4137 line 4
- Cap the deductible amount at $25,000
✅ Where to Enter
Federal → Deductions → Additional Deductions → No Tax on Tips → + Add tip employer
If the tip income was included on Forms 1099-NEC, MISC, or K, enter under Federal → Deductions → Additional Deductions → No Tax on Tips → Qualified tips included on Form 1099-NEC, 1099-MISC or 1099-K
⚠ Important
This is not a full exemption from taxes — payroll taxes (SS & Medicare) still apply.
How to Report Tip Income
✅ If all tips were reported to your employer
- Box 7 and Box 8 automatically flow into income
- No additional steps unless claiming the No Tax on Tips deduction
✅ If tips were NOT reported to your employer
- Add the unreported tip total to Box 1 wages
- Complete Form 4137 in “Other Taxes”
- Program calculates SS/Medicare tax
- Add the amount when calculating No Tax on Tips deduction, if eligible
✅ If claiming the No Tax on Tips deduction (2025–2028)
- Report all tips (reported + unreported)
- Apply $25,000 cap
- Enter the deduction in the “Additional Deductions” section
Example
Scenario: A bartender has:
- $15,000 in Box 7
- $5,000 reported to employer via Form 4070
- $2,000 unreported tips (Form 4137)
Total qualifying tips:
$15,000 + ($5,000 − overlap if any) + $2,000 = $22,000
Since this is below $25,000, the taxpayer may deduct the full $22,000
Additional Information
Visit the IRS website for more information regarding the No Tax on Tips deduction and the One Big Beautiful Bill Act.