No tax on tips in 2026: who qualifies, how much, and what to keep
Updated November 1, 2026. Written for California owners, workers and freelancers; not legal or tax advice.
The 2025 tax law (often called the One Big Beautiful Bill Act) created a new federal deduction for tips, new Internal Revenue Code §224. It applies to tax years 2025 through 2028 and is claimed on the new Schedule 1-A.
The short version
- Deduct up to $25,000 of qualified tips per return (the limit is the same for a joint return)
- Reduced by $100 for each full $1,000 of modified AGI over $150,000 ($300,000 joint)
- Available whether or not you itemize
- You need a Social Security number valid for employment. If married, you must file jointly
- Reduces federal income tax only. Social Security and Medicare tax still apply, and so does California income tax
What counts as a qualified tip?
Cash or charged tips that the customer pays voluntarily and decides the amount of, received in an occupation that customarily and regularly received tips on or before December 31, 2024. Shared tips from a tip pool count. Mandatory service charges, such as an automatic 20% for large parties, do not. The IRS has published a list of qualifying occupations, which includes servers, bartenders, hairstylists, delivery drivers and many more.
The tips must be properly reported: on your W-2, a 1099, or Form 4137 for unreported tips you report yourself.
Who is left out?
- Self-employed people in a specified service trade or business (such as health, law, performing arts, consulting and athletics), and employees whose employer is in one
- Married people filing separately
- Self-employed workers can't deduct more than the net profit of the business the tips came from
Where the numbers appear in 2026
For 2026, employers report qualified tips on Form W-2 in box 12 with code TP. If you're self-employed, check the tip amounts on any 1099 forms you get against your own records. Keep your own tip log anyway: employer reporting in the first years is likely to have errors.
Worked example
Maya, a single bartender in San Diego, earned $42,000 in wages and $18,000 in reported tips in 2026. Her MAGI is $60,000, under the $150,000 threshold, so there's no phase-out.
- Tips deduction: $18,000
- Taxable income before the deduction: $60,000 − $16,100 standard deduction = $43,900
- After the deduction: $25,900
- Federal tax saved: about $2,160 (the $18,000 comes out of the 12% bracket)
She'll still pay 7.65% FICA on the tips, and California will tax them.
The phase-out, step by step
Schedule 1-A works like this: subtract the threshold from MAGI, divide by $1,000 and drop the remainder, then multiply by $100. A single filer with $162,500 MAGI: $12,500 over → 12 full thousands → $1,200 reduction → a $25,000 tip limit becomes $23,800.
Estimate yours in the free calculator →
The 2026 New Deductions Workbook logs tips by shift and estimates your Schedule 1-A numbers through the year (file with the official form or your tax software).