On July 4th, 2025, President Trump signed the One Big Beautiful Bill (BBB) into law.  At the time, the title of the bill served a purpose – jumpstarting change by pushing through a massive amount of legislation in a single act.  Although the sales tactic was effective, the title did little to inform the public about provisions significantly impacting their lives.

As a result, few taxpayers realize how many changes will increase the disposable income of middle-class (and lower-class) individuals and families.  These changes include making the Qualified Business Income Deduction (a small-business windfall) permanent, a $12,000 Bonus Deduction for Married Seniors ($6,000 for singles), and a charitable deduction that filers can take without itemizing.

The BBB also includes a new deduction that will substantially increase the purchasing power of service workers - the ability to deduct tips they receive during the year.  How much will these deductions increase the buying power of those who qualify?  Consider this: Every $100 of tips deducted puts between $10 and $24 back into your pocket!

In earlier newsletters, we outlined how No Tax on Tips and Overtime (YouTube Tips, YouTube Overtime) will work, including the qualifying deductions and income limits.  This article covers recent developments on qualified tips and how to report them in 2025.  But first, let’s review the basics:

The Basics:

From 2025 to 2028, individuals who work in qualifying occupations (discussed below) and receive qualified tips (discussed next) can deduct up to $25,000 per year from their taxable income.  The $25,000 limit is a “per tax return” limit, meaning it applies to Married Couples Filing Jointly and to those filing Single or as Head of Household.  The deduction is not allowed for married couples filing separately.

The tip deduction also has income limitations, which are generous given the annual earnings of many tip-receiving occupations.  For married filers, qualified tips are 100% deductible until your Modified Adjusted Gross Income (add back a bunch of deductions and exclusions to AGI) reaches $300,000 and is reduced to zero at $550,000.  For other filers, the phaseout ranges from $150,000 to $400,000.    

Enter IRS Notice 2025-69: 

Late in the week of November 17th, 2025, the IRS released Guidance for Taxpayers who Receive Qualified Tips or Qualified Overtime Compensation in 2025.  That’s a long title for telling the world, “Get ready.  It’s going to get messy.”

The notice informs employers that, because it’s too late to change 2025 forms and [likely] computer programs, employers are not required to report qualified tips to employees on their W-2s or other statements.  So, it will be the employee’s responsibility to determine tips that qualify for deduction on their 2025 income tax return.  We’ll get to 2025 reporting shortly.  To do so, they must know the definition of qualified tips, as provided in Notice 2025-69.

Defining Qualified Tips:

Qualified tips are defined as voluntary remittances from customers to the recipient that exceed the cost of the product or service purchased. Tips are not negotiable, and there are no consequences for nonpayment (i.e., TIPs!).  

The tips must take the form of cash or cash equivalents (such as checks, credit or debit card payments), but may also include gift cards or tokens with a fixed value that can be easily converted to cash.

Qualified tips include shared tip pools, such as the tip jar at the ice cream parlor, as well as allocated tips.  Allocated tips are tips that food and beverage industry employers must assign to employees when employees' total tips reported on a given day are below a certain percentage of food and beverage sales, generally 8%.  Allocated tips are reported to employees in Box 8 of Form W-2.

Surcharges are Not Tips: Nonnegotiable surcharges, such as those imposed when the number of customers reaches a specific threshold (e.g., a 15% gratuity fee for parties of 10 or more), do not qualify as tips.  Such fees are considered service charges, not tips.

Do the Self-Employed Qualify? 

YES!  The IRS has finally acknowledged what many were speculating about and hoping for.  Self-employed workers in both the gig economy (such as Uber, DoorDash, or Instacart) and the personal service industries (such as beauticians, hair stylists, and massage therapists) qualify for the No Tax on Tips deduction.  Other small business owners (yes, gig workers are small business owners) who work in qualifying industries (discussed next) that customarily receive tips will also be eligible.  The business must also be profitable because the tip deduction cannot exceed that profit. 

The key for the self-employed will be both tracking and proving income that meets the tip definition.  

We’ll discuss employee and self-employed tip reporting in a few minutes, but before any tips can be deducted, we need to know which occupations qualify.

Qualifying Industries & Occupations

To qualify for the deduction, tips meeting the definition above must be received while working in an industry that customarily received tips before 12/31/2024, a date that prevents numerous newly tipped industries from sprouting like dandelions. 

On September 19, 2025, the Treasury Department released Proposed Regulations regarding Occupations that Customarily and Regularly Received Tips.  The regs list eight broad categories of industries that receive qualified tips: 

The regs then list 68 specific occupations that qualify in these industries.  Each job is assigned a code, the Treasury Tipped Occupation Code (TTOC), which is required when completing tax returns.  

It’s quite a broad and somewhat surprising swath of jobs.  Here they are:

Note - Legal Occupations Only: To qualify for the tip deduction, the industry must be legal per federal law, regardless of state law.  For this reason, you may notice that two occupations are specifically excluded: Prostitution and jobs related to the marijuana industry, even in states where they are legal.

Reporting Tips 2025 & Later Years

Employees - Reporting Qualified Tips for 2025:

As mentioned at the outset, employers do not have a standard reporting mechanism to inform employees and the IRS of the qualified tips they received in 2025.  These will arrive in 2026, with changes to Form W-2 that include new codes for Qualified Tips and Overtime and a new box, Box 14b, for the Treasury Tipped Occupation Code (listed above).

This leaves employees on their own when reporting Qualified Tips for 2025.  Fortunately, IRS Notice 2025-69 provides guidance to employees on calculating their tip deductions.  Here it is.

 The IRS offers employees three options for determining their qualified tips for 2025.  The presumption, of course, is that employees know they work in a qualified occupation.  Here they are:

1. Employees can use their Social Security Tips reports in Box 7 of their 2025 W-2.  

2. Use the total of tips reported to their employer(s) on Forms 4070, during the year.  Employees are supposed to report their tips to their employer within ten days of the end of each month in which they receive $20 or more in cash or credit/debit card tips. Form 4070 is used to report these tips.

3. Use amounts reported by their employer as qualified tips for the year, preferably in Box 14 (an “other info” box) of their 2025 W-2.

In addition to these options, the IRS informs elite tax-citizen employees that they can also add the amount shown on Line 4 of their 2025 Form 4137 to any qualified tips calculated using these three options.  Form 4137 is titled Social Security and Medicare Tax on Unreported Tip Income, which is attached to the taxpayer’s Form 1040.

A Bonus Tip Wrinkle: In an example provided in Notice 2025-69, employees are informed that they can deduct the greater of the Social Security Tips reported on their W-2 and the amounts reported to their employer via Form 4070, plus Line 7 of Form 4137.  

Here’s a personalized version of this example:

Billy, the bartender, reported $20,000 in tips to his qualified tip employers in 2025 on Forms 4070, but the total of his Social Security Tips reported in Box 7 of his Forms W-2 totaled $15,000.  His employers did not report his qualified tips to him on his W-2s or other statements.  In addition, Billy (our tax-hero bartender who reports every penny of his cash tips) also reports $4,000 in otherwise unreported tips on his Form 4137.

Bill can include either the total of Forms 4070 ($210,000) or the $15,000 from his Box W-2s as qualified tips.  In either case, he can also add the $4,000 reported on Form 4137 to the qualified tips entered on Part II of Schedule 1-A.

Employees: Reporting Qualified Tips for 2026 & Later:

In 2026 and later years, it will be the employer’s responsibility to inform qualified tips on their W-2s.  To this end, starting in 2026, two changes will appear on Form W-2.  First, Box 14 will be divided into two sections, and Box 14b, Treasury Tipped Occupation Code, will be used to report the codes reviewed earlier.  Second, a new code, “TP,” will be generated to report Qualified Tips in Box 12.

Self-Employed Reporting Qualified Tips 2025:

As mentioned above, business owners and independent contractors (also business owners) can deduct qualified tips from their taxable income.  However, it will be the owner’s responsibility to prove (substantiate) that they work in a qualified occupation and that any tips deducted meet the definition of Qualified Tips.  Unlike employees, owners will have no employer-generated reports to base their deductions on.  Therefore, I anticipate a high level of scrutiny of owners who attempt to deduct a substantial portion of their revenues as qualified tips.  

As a result, be sure to back up your tip deduction with physical records, such as customer receipts that show both the goods and services billed and additional voluntary tips.  A daily log may also work.   For gig workers, such as DoorDash and Uber drivers, tip records may be readily available through your driver app.  For others, such as beauticians, especially those without payment software that tracks customer tips separately, calculating deductible tips may prove a challenge.

The IRS offers an example of a travel guide who received $7,000 in tips paid via debit cards and credit cards.  The travel guide received no third-party tip reporting in 2025, but because she kept a detailed log showing customers, dates, and tip amounts received, she was able to deduct the entire $7,000.  

Note: Although cash tips are deductible, the IRS guidance does not mention them in its self-employed example.  

Self-Employed: Reporting Qualified Tips for 2026 & Later:

In 2026 and later years, much of the self-employed tip-reporting will be pushed to businesses that pay their vendors in cash or checks, and to third-party facilitators who process credit & credit card payments on the recipient’s behalf.  

Those who are required to send Form 1099-NEC (draft) must include tips in a new box, Box 1b Cash Tips, and report the Treasury Tipped Occupation Code in Box 1C.  (Incidentally, a new Box 1d reports overtime).  Similarly, the 2026 1099-K, Payment Card and Third Party Network Transactions (draft) also includes a new box for Cash Tips (Box 1c) and a Treasury Tipped Occupation Code (1d).

Thank You!

We hope this article has helped you better understand reporting qualified tips in 2025 and later years.  We invite you to check out Overnight Accountant’s course offerings and blog page.  We’re also adding materials to our X account and YouTube Channel to keep Tax Pros, Taxpayers, and Business Owners informed and to help them increase their income and save on taxes.