No Tax on Tips 2026: Complete Guide to the New Tax Law
Starting in 2026, tipped workers can deduct up to $25,000 in tip income from their federal taxes. Here's everything you need to know about who qualifies, how to claim it, and how much you'll actually save.
Key Facts at a Glance
In This Guide
1. What Is the No Tax on Tips Law?
The "No Tax on Tips" provision is part of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. It allows employees who receive tips to deduct up to $25,000 of their tip income from federal taxes.
In Plain English
If you're a server earning $30,000 in tips, the first $25,000 won't be taxed for federal income tax purposes. You'd only pay federal income tax on the remaining $5,000 in tips.
This is a major win for the estimated 4.5 million tipped workers in the United States, including:
- Restaurant servers and bartenders
- Hotel and casino workers
- Hairdressers, barbers, and nail technicians
- Valets and parking attendants
- Food delivery drivers (as employees)
- Tour guides and taxi drivers
2. Who Qualifies for the Deduction?
Not everyone who earns tips qualifies. Here are the eligibility requirements:
You QUALIFY If:
- You're an employee (W-2 worker), not self-employed
- You receive tips directly from customers or through tip pooling
- Your adjusted gross income (AGI) is under $160,000
- You report your tips to your employer and on your tax return
You DO NOT Qualify If:
- You're self-employed (1099 contractor) - gig workers like DoorDash drivers don't qualify
- You're a business owner receiving tips (restaurant owners, salon owners)
- Your AGI exceeds $160,000 (the deduction phases out completely)
- You receive "service charges" added by the employer (these are wages, not tips)
Gig Workers: Important Clarification
If you drive for Uber, DoorDash, Instacart, or similar services, you're classified as a 1099 independent contractor - not an employee. The No Tax on Tips deduction does not apply to you. However, you can still deduct business expenses on Schedule C.
3. How Much Will You Save?
Your savings depend on your total tip income and your tax bracket. Here's a realistic breakdown:
| Annual Tips | Tax Bracket | Federal Tax Savings | Monthly Savings |
|---|---|---|---|
| $10,000 | 12% | $1,200 | $100 |
| $15,000 | 12% | $1,800 | $150 |
| $20,000 | 22% | $4,400 | $367 |
| $25,000 | 22% | $5,500 | $458 |
| $30,000 | 22% | $5,500* | $458 |
| $40,000 | 24% | $6,000* | $500 |
*Capped at $25,000 deduction. Savings based on the 2026 tax brackets.
Real-World Example: Full-Time Server
Your Situation
- Base wage: $2.13/hour (tipped minimum)
- Annual base: ~$4,400
- Annual tips: $28,000
- Total income: ~$32,400
Your Tax Savings
- Deductible tips: $25,000 (max)
- Tax bracket: 12%
- Annual savings: ~$3,000
- Monthly savings: ~$250
4. How to Claim the Deduction (Step-by-Step)
You'll claim this deduction when filing your 2026 taxes (in early 2027). Here's what to do:
Track Your Tips Throughout 2026
Keep a daily record of all tips received - both cash and credit card tips. Use a tip tracking app or simple spreadsheet. You'll need documentation if audited.
Report Tips to Your Employer Monthly
If you earn $20 or more in tips per month, you must report them to your employer by the 10th of the following month using Form 4070 or your employer's system. This is already required by law.
Receive Your W-2 in January 2027
Your employer will report your total wages and tips on your W-2 in Box 1 (Wages) and Box 7 (Social Security tips). Review it for accuracy.
File Your Taxes and Claim the Deduction
When you file your 2026 taxes, the deduction will be claimed on a new line (expected to be added to Form 1040 or a new schedule). Tax software like TurboTax, H&R Block, and FreeTaxUSA will handle this automatically.
Pro Tip: Don't Wait Until Tax Time
Start tracking your tips now. Use a free app like Tip Tracker, TipSee, or just a Google Sheets spreadsheet. Having clean records makes filing easier and protects you in an audit.
5. What's Still Taxed (Important!)
The No Tax on Tips law only applies to federal income tax. Here's what you still owe:
| Tax Type | Rate | Exempt Under New Law? |
|---|---|---|
| Federal Income Tax | 10-37% | YES (up to $25,000) |
| Social Security Tax | 6.2% | No - Still owed |
| Medicare Tax | 1.45% | No - Still owed |
| State Income Tax | 0-13%+ | No - Check your state |
Social Security & Medicare Still Apply
You'll still pay 7.65% (6.2% Social Security + 1.45% Medicare) on ALL your tip income. On $25,000 in tips, that's still $1,912.50 in payroll taxes.
The silver lining: These contributions build your Social Security benefits for retirement.
What About State Taxes?
The federal law doesn't affect state income taxes. Some states may pass their own "no tax on tips" laws, but as of now:
- No state income tax (no impact): TX, FL, NV, WA, WY, SD, AK, TN (wages only), NH (interest/dividends only)
- States considering similar laws: Check your state legislature for updates
- All other states: Tips remain fully taxable at the state level
6. Common Questions Answered
Q: Can I claim No Tax on Tips for 2025?
No. The law takes effect in 2026. Tips earned in 2025 are still fully taxable. You'll first claim the deduction when filing your 2026 taxes in early 2027.
Q: What if I earn more than $25,000 in tips?
You deduct the first $25,000 and pay normal federal income tax on anything above that. For example, if you earn $35,000 in tips, you pay federal income tax on only $10,000 of that.
Q: Do I still need to report cash tips?
Yes! You must report ALL tips - cash and credit card - to your employer and on your tax return. Not reporting tips is illegal and can result in penalties, back taxes, and even criminal charges.
Q: I work two jobs with tips. Can I deduct $25,000 from each?
No. The $25,000 limit is per person, not per job. If you earn $15,000 in tips at Job A and $20,000 at Job B, you can only deduct $25,000 total, not $35,000.
Q: What's the difference between tips and service charges?
Tips are voluntary payments from customers directly to you. Service charges (like mandatory gratuity) are set by the employer and are classified as regular wages - they don't qualify for this deduction.
Q: I'm a gig worker (DoorDash, Uber Eats). Do I qualify?
Unfortunately, no. Gig workers are classified as independent contractors (1099), not employees (W-2). The deduction only applies to W-2 employees who receive tips.
7. How to Prepare Now
The law takes effect January 1, 2026. Here's how to prepare:
Your 2026 Preparation Checklist
Use Your Tax Savings Wisely
If you're saving $200-500/month in taxes, put that money to work! Our free calculators can help you plan:
The Bottom Line
The No Tax on Tips law is a significant benefit for tipped workers, potentially saving $1,200-$6,000+ per year in federal income taxes. To maximize your savings:
- Make sure you're classified as a W-2 employee (not 1099 contractor)
- Track and report ALL your tips - unreported tips don't qualify for the deduction
- Keep detailed records in case of an audit
- Remember you still owe Social Security, Medicare, and state taxes on tips
- Use tax software in 2027 - it will automatically calculate your deduction