Eligibility to Deduct Tip Income
- The deduction relates to earnings from jobs that are considered to “customarily and regularly receive tips.” A final list of occupations was published by the IRS on Oct 2, 2025. Read it here.
- The deduction only applies to cash or credit card tips that are reported to the employer or self-reported on Form 4137.
- The deduction phases out for individuals with higher incomes: over $150,000 modified AGI for single filers, or $300,000 for joint filers.
- Must have a SSN and file jointly if married. Employees with ITIN’s do not qualify.
- Payroll taxes are still in effect. Social Security and Medicare taxes will continue to be collected on all tip income.
- The deduction is not allowed if prior year compensation (2024) exceeded $160,000.
Employer Credit Expansion
The employer tax credit for FICA taxes on wages is expanded. Now, it covers not only restaurant/food tips but also tips in the beauty industry (barbering, hair, nail, esthetics, body/spa).
The credit is credit against federal income taxes.
- For a Sole Proprietor, the credit is taken on the 1040 where the schedule C is reported.
- For Partnerships, the credit is passed through to partners in proportion to ownership.
- For C Corporations the credit is taken on the 1120 and applied towards federal income tax.
- For S Corporations the credit is passed through to the shareholders in proportion to ownership.
What Tips Count?
Tips that count
- Voluntary cash/credit card tips from customers or tip sharing, reported to employer and on tax forms, tips reported to employer or on IRS form 4137.
- Tips received in barbering, hair care, nail care, esthetics, and spa services are eligible for the employer tax credit; employees can claim the deduction if their occupation is on the IRS list.
Tips that DO NOT count
- Service charges added by employer, automatic gratuities charged to customers, unreported tips, and tips in non-listed occupations.
Industry Specific Information
Employers
Employers are now eligible for the tax credit for payroll taxes paid on tips reported by employees in qualifying beauty services.
Employees
Hair stylists, barbers, nail techs, estheticians, etc., whose occupations are listed by the IRS, can claim the tip deduction if they meet all criteria.
Self-Employed
Can claim up to $25,000 deduction if not an SSTB, limited by net income from the business, and if their occupation is on the IRS list.
Frequently Asked Questions
Yes, however the 2025 W-2 form will not be changed to allow for additional information.
- Tips are normally reported in box 7 of the W-2. Allocated tips are reported in box 8.
- Employers must provide the employee with their tip income and occupation name in order to satisfy the reporting requirement.
- Employers claiming the Taxes on Tip Credit must report the employee occupations to the IRS and provide statements to employees.
No, only voluntary tips count for the deduction.
Voluntary cash/credit card tips from customers or tip sharing, reported to employer and on tax forms.
Yes. Employers must report tips and occupation to the IRS and provide statements to employees.
If employees have unreported tips, they will use IRS Form 4137 to claim the deduction on their 1040 income tax return.
Only if their occupation is listed by the IRS and other eligibility requirements are met.
The following list of occupations that receive tips will be organized according to a new categorization system created by the Treasury Department and the IRS. These specific occupations are each assigned a three-digit code called a “Treasury Tipped Occupation Code” or “TTOC” and will be grouped together in the following more general occupational categories:
- 100s – Beverage and Food Service
- 200s – Entertainment and Events
- 300s – Hospitality and Guest Services
- 400s – Home Services
- 500s – Personal Services
- 600s – Personal Appearance and Wellness
- 700s – Recreation and Instruction
- 800s – Transportation and Delivery
More information can be found starting on page 33 of the Definition of Qualified Tips document provided by the IRS.