Key Takeaways
- You can subtract up to $25,000 of the tips you earned from your 2025 taxable income, which lowers your tax burden.
- However, you’ll have to calculate the deduction yourself.
Workers who received gratuities in 2025 should begin collecting the records now to ensure they can take full advantage of a new tax break.
The new tax deduction on tips is part of the “One Big, Beautiful Bill” Act. Workers can subtract up to $25,000 of the tips they earned in 2025 from their taxable income with this break. This means they will pay less in taxes when they file in April.
According to IRS rules, if you receive tips, you must keep a record of them. If you earn more than $20 a month in tips, you have to report your tips to your employer by the 10th of the month after the month you received them.
You must also report what you earned in tips to the IRS on your annual tax return. The IRS has stated that 2025 W-2s will not reflect the new tip deduction, and employers will not be required to provide the total amount of tips their workers received in 2025. That means to take advantage of the new deduction, you might have to calculate how much you received in tips in 2025.
Why This Matters
There are about 6 million workers who report tipped wages, according to the IRS. This deduction will lower their annual tax bills.
Investopedia talked to Alison Flores, director of tax research and content strategy at H&R Block, about what this new deduction means for workers and what you should do before the end of the year to properly calculate the tips you received. This interview has been edited for brevity and clarity.
INVESTOPEDIA: How will this new deduction work for tipped workers?
ALISON FLORES: The confusing part about this is, if you’ve heard ‘no tax on tips’, it’s not that you’ve excluded it from your income or that you didn’t report it to your employer.
What you’re going to do is, you’re going to continue reporting all your tips to your employer, and then when you do your taxes, you’ll take a deduction up to $25,000. In addition, for this particular deduction, you don’t have to itemize your deductions.
There are some restrictions based on your total income, and there is also a filing status restriction. So you cannot claim this if you’re married and filing separately. But we do expect that most tip workers will be able to take advantage of this deduction.
INVESTOPEDIA: The IRS said it won’t be able to update W-2 forms in time before employers must send them out. What does this mean for tipped workers?
FLORES: In the law that contains the tip deduction, it says employers have to specifically report on the W-2 the amount of tips that qualify for this deduction. So if you’ve ever looked at your W-2 and it’s got a box with all kinds of things like 401(K) contributions, and how much your health insurance costs, it would list your qualified tips.
It should also have a new box that would say what type of tipped employee you are. There’s a list of tipped employees who qualify. So there will be a box on the W-2 that gives confirmation from the employer that basically says, ‘Yes, I’m an employee who can deduct tips.’
One issue is that the law was passed in the middle of the year. Although this was signed into law on July 4, it’s retroactive to the beginning of 2025. Many employers won’t be able to create a system that reflects their workers’ total tip amounts in time for W-2s, which need to be issued next month.
INVESTOPEDIA: How can workers calculate their own tip amounts from 2025 in order to utilize the deduction when they file?
FLORES: We do expect most people to be able to use their W-2 to obtain this amount. For tipped employees, you usually have a box, typically Box 7, with an amount that says ‘Social Security Tips’ or ‘Tips Subject to Social Security.’ That’s a pretty good proxy for what we would use for the tip deduction, and it’s very easy, since it’s on your W-2.
Another option we can use is that you should be reporting tips to your employer at least once a month, but most employers actually require that more frequently. They might require you to put in your tips at the end of the day, at the end of your shift, or they might require you to report your tips at the end of the pay period. So we would be looking for your complete records of what you reported to the employer.
Sometimes, though, you might have tips that you haven’t reported to your employer, or you have allocated tips that your employer doesn’t include in your W-2. In that case, report those on your tax return, so they will be included in your income tax. You will pay your share of the Social Security and Medicare taxes, and then those will also be eligible for the tips deduction.
INVESTOPEDIA: Any other pieces of advice for tipped workers?
FLORES: If you are self-employed and you receive tips, you can also qualify.
This is something that we really want to make sure self-employed people are aware of. However, this is currently available only to individuals who receive a 1099 for their self-employment. That could be a 1099-K from PayPal or Venmo, or a 1099-NEC as a contractor. But in that case, there’s also no specific tip box, so you’re going to need a record that reconstructs your tips vs. regular payments. You’ll need to maintain very good records of this.
If you work multiple jobs, just remember that the deduction is up to $25,000 total, not per employer. And again, you’ll really want to keep good records. Keep those records throughout the year as you go along.
