No Tax on Tips Calculator: Estimate Your Federal Deduction
No tax on tips is a federal income tax deduction (26 U.S.C. 224) for tax years 2025 through 2028. It lets you deduct qualified tips, which are voluntary cash or charged tips received in an occupation on the Treasury list, up to $25,000 per return. The cap is the same for single and joint filers. The deduction shrinks for modified AGI above $150,000 ($300,000 joint), and married people must file jointly. It is a deduction, not an exclusion: tips are still taxable income, and Social Security and Medicare tax generally still apply to them. Use the calculator below to estimate your deduction.
Maintained by Archie Chang · Rules checked against the statute, the final regulations and IRS guidance on October 28, 2026 · Methodology & sources
Not affiliated with the IRS. FedRateCalc is an independent site and is not affiliated with or endorsed by the Internal Revenue Service or the Department of the Treasury. This page is general information, not tax advice. Your Form W-2 and the IRS instructions decide your return.
Not financial advice. This calculator provides estimates for informational and educational purposes only. Results are not a loan offer or a guarantee of terms. Always confirm figures with a qualified lender or financial advisor before making decisions.
Your tips and income
Employees: from 2026, start from W-2 box 12, code TP. For 2025 the W-2 had no separate tip line, so use your W-2 box 7, or the total tips on your Forms 4070, or an amount your employer reports in box 14, plus any unreported tips on Form 4137, line 4. Self-employed tips go in the business rows below. On a joint return, enter both spouses’ combined amounts.
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Self-employed or gig tips: one row per business, up to three. The net income limit applies to each business on its own and never to employee tips. Net income is the business’s gross income less its other deductions; leave a row blank if it does not apply.
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Your estimated tips deduction
Qualified tips counted
$12,000.00
Cap (one $25,000 cap per return)
$25,000.00
Qualified amount after the cap
$12,000.00
Income phase-out reduction (0 whole $1,000 over $150,000)
−$0.00
Estimated federal deduction
$12,000.00
Estimated federal income tax saved at 12%
$1,440.00
Estimate only: deduction times your chosen marginal rate. It ignores bracket edges, credits and anything else on your return.
Social Security and Medicare tax generally still apply to tips; this deduction does not reduce them. This calculator does not estimate state income tax; whether your state allows a similar deduction depends on your state’s law.
“Beverage and Food Service” is one of the eight categories on the Treasury list, but the list names specific occupations inside each category. Confirm that your own occupation is one of them.
From 2026, start from the tips in W-2 box 12, code TP (or the 1099 tip amount), but never more than the qualified tips you actually received; the net income limit for self-employed tips, the cap and the phase-out then apply.
How no tax on tips works
Section 224 of the Internal Revenue Code, added by Public Law 119-21 (the 2025 reconciliation act), allows a deduction for qualified tips. The statute sets the deduction and the limit:
“There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual pursuant to section 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor).”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
“The amount allowed as a deduction under this section for any taxable year shall not exceed $25,000.”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
The cap is one amount for every filing status. The final regulations say so, and give a joint example:
“The amount allowed as a deduction under section 224(a) and paragraph (a) of this section for any taxable year shall not exceed $25,000, regardless of filing status.”
“Since the combined amount of their qualified tips is greater than the $25,000 limitation in paragraph (b)(1) of this section, the total qualified tip amount is first reduced from $35,000 to $25,000.”
“You can’t deduct more than $25,000 of qualified tips, regardless of your filing status.”
2025 Instructions for Form 1040, Schedule 1-A Part II
The deduction then goes through the income phase-out. If your modified AGI is above the threshold, the capped amount is reduced:
“The amount allowable as a deduction under subsection (a) (after application of paragraph (1)) shall be reduced (but not below zero) by $100 for each $1,000 by which the taxpayer's modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
Modified AGI (MAGI) starts from the adjusted gross income on your Form 1040 plus any income you excluded under sections 911, 931 or 933; Part I of Schedule 1-A figures it. Partial thousands do not count. On the 2025 Schedule 1-A the rounding is on line 11:
“Divide line 10 by $1,000. If the resulting number isn’t a whole number, decrease the result to the next lower whole number. (For example, decrease 1.5 to 1, and decrease 0.05 to 0.)”
2025 Schedule 1-A (Form 1040), Part II, line 11
The 2026 early release draft of Schedule 1-A (marked “DRAFT — DO NOT FILE”) keeps the same rule, on line 13, so the rounding is expected to hold for 2026. Check the final form when the IRS publishes it:
“Divide line 12 by $1,000. If the resulting number isn’t a whole number, decrease the result to the next lower whole number. (For example, decrease 1.5 to 1, and decrease 0.05 to 0.)”
2026 Schedule 1-A (Form 1040), early release DRAFT, Part II, line 13
So $999 over the threshold costs nothing, and $1,000 over costs $100. The statute says “for each $1,000” and does not say “or portion thereof”, which is consistent with the form.
Worked examples
Under the limits. A single server has $18,000 of qualified tips in 2026 and modified AGI of $62,000, below $150,000. The deduction is $18,000. At a 12% marginal rate that saves about $2,160.
Cap and phase-out together. A single bartender has $30,000 of qualified tips, so the cap cuts the amount to $25,000. Modified AGI of $180,000 is $30,000 over $150,000, which is 30 whole thousands, so the reduction is 30 × $100 = $3,000. The deduction is $22,000, saving about $4,840 at 22%.
Joint return. A couple has $15,000 and $20,000 of qualified tips, $35,000 together. The one $25,000 cap applies to the combined amount, so it falls to $25,000. Modified AGI of $320,000 is $20,000 over $300,000, so the reduction is 20 × $100 = $2,000 and the deduction is $23,000, saving about $5,520 at 24%.
Self-employed. The regulation’s second example: a manicurist who owns a salon has $20,000 of qualified tips, and the business’s gross income less its other deductions is $15,000. The tips count only up to that net income, so the deduction is $15,000.
Employee and gig tips. A server has $18,000 of tips on the W-2 and $2,000 of tips from a side business with $1,000 of net income. The limit applies to the side business only, so its tips count as $1,000, the employee tips count in full, and the total is $19,000. Employee tips are never limited by net income.
These results are estimates of the deduction and of the tax it saves, not of your refund. The calculator does not know your other credits, bracket edges, or the amount your employer reported.
Who qualifies and who does not
You can claim the deduction if all of these are true:
Your tips are qualified tips, as explained in the next section.
You received them in an occupation on the Treasury list. The IRS describes it this way:
“Qualified tips are voluntary cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024.”
IRS, Tip recordkeeping and reporting
The final regulations list the occupations in Table 1 and state:
“The occupations in table 1 to this paragraph (h) customarily and regularly received tips on or before December 31, 2024.”
The list has eight categories and 71 occupations, each with a three-digit code, the Treasury Tipped Occupation Code (for example, 101 for Bartenders). A few of the occupation titles in each category, exactly as the regulation prints them:
Beverage and Food Service:Bartenders (101); Wait Staff (102); Chefs and Cooks (105); Host Staff, Restaurant, Lounge, and Coffee Shop (109).
Entertainment and Events:Gambling Dealers (201); Dancers (205); Musicians and Singers (206); Digital Content Creators (209).
Hospitality and Guest Services:Baggage Porters and Bellhops (301); Concierges (302); Maids and Housekeeping Cleaners (304).
Home Services:Home Maintenance and Repair Workers (401); Home Cleaning Service Workers (407); Locksmiths (408).
Personal Services:Tutors (507); Nannies and Babysitters (508); Floral Designers (510).
Personal Appearance and Wellness:Barbers, Hairdressers, Hairstylists, and Cosmetologists (603); Manicurists and Pedicurists (605); Exercise Trainers and Group Fitness Instructors (608); Tattoo Artists and Piercers (609).
Recreation and Instruction:Golf Caddies (701); Tour Guides (704).
Transportation and Delivery:Parking and Valet Attendants (801); Taxi and Rideshare Drivers and Chauffeurs (802); Goods Delivery People (804).
If your job is not on the list, your tips do not qualify, even if customers tip you. In 2025 you had to work this out yourself:
“Although the occupation of an employee receiving tips may not appear on the Form W-2 furnished to the employee in 2025, the employee is still responsible for determining whether the tips received by the employee were received in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.”
IRS Notice 2025-69
From 2026 your employer reports the occupation. Box 14b of the W-2 holds the code:
“If any tips were received in a nonqualifying occupation, then “000” must be input as one of the occupation code(s).”
2026 General Instructions for Forms W-2 and W-3
You file as single, head of household or married filing jointly. For married people the statute says:
“If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer's spouse file a joint return for the taxable year.”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
Married filing separately is therefore not allowed. The final regulations add what the Social Security number rule means for couples:
“Taxpayers who are married, as defined by section 7703, must file a joint return to claim the deduction allowed by section 224. However, to claim the deduction allowed by section 224, married taxpayers are required to include only the SSN of the taxpayer who has received the tips to claim the deduction, and an SSN is required of both taxpayers only when both have qualified tips for which the deduction is being claimed.”
You have a Social Security number on the return. The statute requires it:
“No deduction shall be allowed under this section unless the taxpayer includes on the return of tax for the taxable year such individual's social security number.”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
The IRS adds what counts as valid:
“A valid SSN for purposes of the deduction for qualified tips is one that is valid for employment and that is issued by the Social Security Administration (SSA) before the due date of your 2025 return (including extensions).”
2025 Instructions for Form 1040, Schedule 1-A Part II
Specified service trade or business
Tips do not qualify when they are received in a specified service trade or business (a term the statute takes from section 199A(d)(2)). The rule for employees depends on the employer, not on the employee’s own job:
“For purposes of subparagraph (B), in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual shall be treated as receiving tips in the course of a trade or business which is a specified service trade or business if the trade or business of the employer is a specified service trade or business.”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
The IRS summarizes it for both groups:
“For self-employed individuals, the deduction may not exceed the individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned. However, the deduction is not allowed for tips received in a specified service trade or business (SSTB) described in section 199A of the Code. For employees, this rule applies if the employee works for an employer that is in an SSTB.”
IRS, Tip recordkeeping and reporting
The IRS has not yet said how to decide whether a business is a specified service trade or business for this deduction. The April 2026 final regulations leave it open:
“The final regulations do not address the specified service trade or business exclusion under section 224, but subsection (g) of Sec. 1.224-1 is reserved for guidance on this exclusion.”
In the meantime, Notice 2025-69 gives transition relief to both employees and self-employed people in a listed occupation:
“Specifically, until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for purposes of section 224 and associated employer information reporting, the IRS will treat the employee as having received tips in the course of a trade or business that is not a specified service trade or business if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.”
IRS Notice 2025-69
The IRS tip page says the relief covers both groups:
“Specifically, until January 1st of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is an SSTB, the IRS will treat both employees and self-employed persons as not having received tips in an SSTB if the worker receives tips in an occupation that customarily and regularly received tips on or before December 31, 2024 (see link above for a list of these occupations).”
IRS, Tip recordkeeping and reporting
Because no final regulations on the question have been issued, a worker in a listed occupation is treated as not in such a business for 2025 and 2026. For 2027 and 2028 the end date depends on when final regulations issue, and this page will be updated. The relief is an enforcement and administration rule, not a change to the statute. The calculator has three answers: “No”; “Yes, but I rely on the Notice 2025-69 transition relief”, which computes the deduction normally and labels it as relying on the relief; and “Yes, and the relief doesn’t apply”, which follows the statute and gives $0.
Self-employed and gig workers
Tips you received in your own trade or business count only up to the net income of that business. The statute says:
“In the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips shall be taken into account under subsection (a) only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions (other than the deduction allowed under this section) allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
The limit is per business, and the 2025 Form 1040 instructions say so:
“The net income limitation applies to each separate trade or business in which you received qualified tips.”
2025 Instructions for Form 1040, Schedule 1-A Part II
“Qualified tips from a trade or business can’t be more than the gross income from the trade or business in which the qualified tips were received minus the total of all deductions allocable to that trade or business, including the deductible part of self-employment tax; the deduction for contributions to self-employed SEP, SIMPLE, and qualified plans; and the self-employed health insurance deduction, but not including the deduction for qualified tips.”
2025 Instructions for Form 1040, Schedule 1-A Part II
It does not apply to employee tips, because the statute excludes “the trade or business of performing services as an employee”. On the 2025 Schedule 1-A, line 6 adds line 4c (employee tips, never limited) and line 5 (self-employed tips, limited business by business). The calculator mirrors that: employee tips go in one field, and self-employed tips go in up to three businesses, each with its own tips and net income. If a business shows a net loss, none of its tips count.
The tips also have to be shown on a statement furnished to you, such as a Form 1099-NEC, 1099-MISC or 1099-K, or reported by you on Form 4137. Self-employed workers do not follow the employee tip reporting rules, but they must keep records that support the amount they claim.
Tips must be reported
The statute counts only tips “included on statements” or “reported by the taxpayer on Form 4137”, quoted at the top of this page. From 2026, section 1.224-1(d)(1) of the regulations adds that the cash tips must be separately reported on that statement, and that is why a W-2 box 12, code TP amount or a 1099 tip amount is the starting point. For 2025 the regulation says:
“In order to be eligible for the deduction under section 224 for taxable years beginning before January 1, 2026, qualified tips must be included in the aggregate amount reported on a statement furnished to the taxpayer pursuant to section 6041(d)(3), section 6041A(e)(3), section 6050W(f)(2), or section 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor), but cash tips do not need to be separately reported on the statement.”
The calculator’s first field is therefore labelled “Qualified tips shown on your W-2/1099 or reported on Form 4137”.
What counts as a qualified tip, and what does not
A qualified tip must be a cash tip, and it must be paid voluntarily. The regulation counts payments by cash, check, credit or debit card, gift card, readily exchangeable tokens such as casino chips, and electronic payment apps, and for employees also tips received through a tip pool. It excludes anything that is not cash:
“Cash tips do not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash.”
Mandatory service charges and automatic gratuities, such as an automatic 18% charge for large parties. The regulations say:
“Thus, service charges, automatic gratuities and any other mandatory amounts automatically added to a customer's (i.e., the payor's) bill by the vendor or establishment are not qualified tips, even if the amounts are subsequently distributed to employees.”
“Mandatory service charges added to the bill are not qualified tips.”
2026 General Instructions for Forms W-2 and W-3
Amounts the customer had no real option to change. A charge the customer can change or remove is not mandatory. The regulation says:
“If a customer is expressly provided an option to disregard or modify amounts (including to zero) added to a bill, such amounts are not mandatory amounts.”
Final regulations, 26 CFR 1.224-1, 91 FR 19026 (April 13, 2026)The IRS instructions say the same:
“Qualified tips do not include service charges, automatic gratuities, or any other mandatory amounts automatically added to a customer’s bill by the vendor or the establishment, unless the customer is expressly provided an option to disregard or modify such charges, gratuities, and amounts without consequence.”
2025 Instructions for Form 1040, Schedule 1-A Part II
Tip-pool amounts paid to managers or supervisors, with an exception for tips they receive directly for their own tipped work:
“Amounts received by a manager or supervisor through a voluntary or mandatory tip-sharing arrangement such as a tip pool are not qualified tips. However, amounts received directly by a supervisor or manager for services they provided in the course of duties performed in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided in paragraph (h) of this section, are qualified tips if all other requirements of this section are met.”
“The fact that a business or worker describes a payment as a “tip” is not determinative.”
IRS, Tip recordkeeping and reporting
Tips received in a specified service trade or business or in an occupation that is not on the Treasury list, as above.
The regulation also treats tips as not qualified in some other cases, such as a recharacterization of wages or payment for goods or services as tips, and amounts for illegal activity. Read 26 CFR 1.224-1(c) if any of those could apply to you.
When it starts and ends
The law applies to taxable years beginning after December 31, 2024. It ends with this rule:
“No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028.”
26 U.S.C. 224, added by Pub. L. 119-21, sec. 70201
In practice that is tax years 2025, 2026, 2027 and 2028. The 2025 deduction is claimed on the return you file in 2026. Nothing in the law extends the deduction past 2028; that would take new legislation. The statute also tells Treasury to change the withholding procedures for taxable years beginning after December 31, 2025 to take the deduction into account (section 70201(i)).
How to claim it
You claim the deduction on Schedule 1-A (Form 1040), Part II, No Tax on Tips. The total of Schedule 1-A goes on line 13b of the 2025 Form 1040 (line 13a on the 2026 draft form). The 2025 Form 1040 instructions say:
“If you are eligible to claim a deduction for no tax on tips, no tax on overtime, no tax on car loan interest, and/or the enhanced deduction for seniors, enter on line 13b the amount, if any, from Schedule 1-A, line 38.”
2025 Instructions for Form 1040, Schedule 1-A Part II
On the 2026 draft Form 1040, line 13a takes the Schedule 1-A total, and the draft is a draft that can still change. You can take the deduction whether you itemize or take the standard deduction:
“The maximum annual deduction is $25,000 per return. The deduction is available whether or not a taxpayer itemizes deductions.”
IRS, Tip recordkeeping and reporting
The statute allows it to non-itemizers by adding it to the deductions in section 63(b). Schedule 1-A starts from your adjusted gross income, and its total goes on line 13b of the 2025 Form 1040, after AGI. The 2026 draft Form 1040 does the same:
“Subtract line 14 from line 11b. If zero or less, enter -0-.”
2026 Form 1040, early release DRAFT, page 2
Line 14 includes line 13a, and line 11b is adjusted gross income. The deduction therefore lowers your taxable income and does not lower your AGI.
Tips are still income. The IRS says:
“These amounts are subject to federal income tax and generally are also subject to Social Security and Medicare taxes.”
IRS, Tip recordkeeping and reporting
This calculator does not estimate state income tax. Whether your state allows a similar deduction depends on your state’s law, and the federal sources cited on this page cover federal income tax only, so check your state revenue agency.
2025 returns
For 2025, the W-2 and 1099 forms did not show tips separately. IRS Notice 2025-69 and the 2025 Form 1040 instructions let an employee use any one of three amounts, plus any unreported tips reported on Form 4137, line 4:
The total of social security tips in your Form W-2, box 7:
“You can use the amount reported to you on your Form W-2 in box 7.”
2025 Instructions for Form 1040, Schedule 1-A Part II
The total tips you reported to your employer:
“Use the total amount of tips reported by the employee to the employer on all Forms 4070, Employee’s Report of Tips to Employer (or any similar substitute form used to monthly report tips to the employer)”
IRS Notice 2025-69
An amount your employer voluntarily reports in box 14 of the W-2 or on a separate statement.
The Form 4137 amount is added to whichever of the three you choose, not an alternative to them:
“In addition to these three options, employees may also include any amount listed on line 4 of the 2025 Form 4137 filed with the employee’s 2025 income tax return (and included as income on that return).”
IRS Notice 2025-69
The 2025 Form 1040 instructions say when Form 4137 is required:
“If you received cash and charge tips of $20 or more in a calendar month and didn’t report all of those tips to your employer, you must file Form 4137.”
2025 Instructions for Form 1040, Schedule 1-A Part II
On the 2025 Schedule 1-A the employee lines are 4a to 4c and the self-employed line is 5; the cap is line 7, the MAGI test is lines 8 to 12 and the deduction is line 13. If you are self-employed, a separate accounting of tips will not appear on your 2025 Form 1099, and the tips must be included in the totals reported to you on the Form 1099-NEC, 1099-MISC or 1099-K. Use receipts, point-of-sale reports or daily tip logs to work out which part of a 1099 total is tips. The IRS says:
“Base your determination of the amount of your qualified tips on documentation such as receipts, point-of-sale system reports, daily tip logs, third party settlement organization records, or other documents that show that the amount you reported as qualified tips is the correct amount.”
2025 Instructions for Form 1040, Schedule 1-A Part II
Keep the documents you rely on.
2026 through 2028
From 2026 the employer reports the tips and your occupation on your W-2. Box 12 holds the tips and box 14b the code:
“New box 12, code TP, will be used to report the total amount of cash tips reported to the employer.”
2026 General Instructions for Forms W-2 and W-3
Other payors, such as businesses paying independent contractors, must separately show tips and the occupation on Forms 1099-NEC, 1099-MISC and 1099-K. The 2026 early release draft of Schedule 1-A asks for W-2 box 12, code TP in column (iii) of line 4. For self-employed tips it asks for the net profit of each business and its other allocable deductions on line 6. As a draft it can still change.
So from 2026, start from the amount reported in W-2 box 12, code TP (or the tip amount on your 1099), but never more than the qualified tips you actually received. The statute allows a deduction for “qualified tips received”, so an overstated form does not raise your deduction. The cap and the phase-out then apply.
No tax on tips vs no tax on overtime
Both deductions are on Schedule 1-A: Part II is No Tax on Tips and Part III is No Tax on Overtime. Each is figured on its own lines with its own cap. On the 2025 form, tips are limited to the smaller of the amount on line 6 or $25,000, with no joint figure, and overtime to the smaller of its amount or $12,500 ($25,000 if married filing jointly). The two parts use the same MAGI from Part I.
An amount cannot be counted as both. The IRS Notice that gave the 2025 guidance says:
“Section 225(c)(2) of the Code excludes from the definition of qualified overtime compensation any qualified tips as defined in section 224(d) of the Code.”
IRS Notice 2025-69
So a dollar of qualified tips is not also qualified overtime compensation. If you work tipped hours and also earn FLSA overtime pay, the overtime deduction covers only the overtime premium the Fair Labor Standards Act requires, not your tips. To estimate that one, see the no tax on overtime calculator. For gross pay with overtime, use the overtime pay calculator.
No tax on tips questions
Are tips really tax-free now?
No. It is a federal income tax deduction, not an exclusion. Your tips are still part of your gross income, and Social Security and Medicare tax generally still apply to them. For tax years 2025 through 2028, you can deduct up to $25,000 per return of qualified tips: voluntary cash or charged tips received in an occupation on the Treasury list, if the other rules are met.
How much can I deduct, and when does it phase out?
The most you can deduct is $25,000 per return, and the cap is not doubled for joint filers. The deduction shrinks by $100 for each full $1,000 your modified AGI is above $150,000 ($300,000 on a joint return). Amounts under $1,000 are dropped: Schedule 1-A rounds down to a whole number of thousands. A single filer who has the full $25,000 loses all of it at $400,000 of modified AGI, and a joint filer at $550,000.
Which jobs qualify?
Only tips received in an occupation on the Treasury list of occupations that customarily and regularly received tips on or before December 31, 2024. The list has eight categories: Beverage and Food Service, Entertainment and Events, Hospitality and Guest Services, Home Services, Personal Services, Personal Appearance and Wellness, Recreation and Instruction, and Transportation and Delivery. Your W-2 shows a Treasury Tipped Occupation Code in box 14b from 2026, and 000 is entered if any tips were received in a nonqualifying occupation.
Does a service charge or automatic gratuity count?
No. Service charges, automatic gratuities and other mandatory amounts added to a bill are not qualified tips, even when the business hands them to employees. If the customer is expressly given an option to change or remove the amount, or adds more on top, the voluntary part can be a qualified tip. A payment is not a tip just because someone calls it one.
What if I work for a salon, practice or other specified service trade or business?
The statute excludes tips received in a specified service trade or business, and an employee is treated as being in one if the employer’s trade or business is one. The IRS has not issued regulations on that question: paragraph (g) of 26 CFR 1.224-1 is reserved. Notice 2025-69 gives relief until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for purposes of section 224 and associated employer information reporting. During that time the IRS treats a worker in a listed occupation as not in such a business, and the IRS tip page says this applies to both employees and self-employed people. With no final regulations yet, that covers 2025 and 2026. For 2027 and 2028 the end date depends on when final regulations issue, and this page will be updated. The calculator has three answers: no, yes but relying on the relief, and yes with no relief, which follows the statute and gives $0.
Does it lower my Social Security tax, Medicare tax or state tax?
It does not lower Social Security or Medicare tax. The IRS says tips are subject to federal income tax and generally also to Social Security and Medicare tax. This calculator does not estimate state income tax. Whether your state allows a similar deduction depends on your state’s law, and the federal sources cited here cover federal income tax only, so check your state revenue agency.
Can I claim no tax on tips and no tax on overtime together?
Each deduction has its own part of Schedule 1-A and its own cap: $25,000 for tips per return and $12,500 ($25,000 joint) for overtime. The same dollars cannot count twice, because the overtime law excludes qualified tips from qualified overtime compensation. See the no tax on overtime calculator for that deduction.