This article is for information only and is not tax advice.
This article explains what qualified tips are and which tips don't qualify for the qualified tips deduction. It's for anyone who answers the qualified tips question in Sprintax Returns.
What qualified tips are
Qualified tips are tips that you receive in an occupation that customarily and regularly receives tips, and that meet each of the following conditions:
The tips come from customers or, if you're an employee, through a tip-sharing arrangement.
The customer pays the tips voluntarily, and the amount isn't subject to negotiation.
The tips are paid in cash or a cash equivalent, such as a check, credit card, debit card, or gift card.
The IRS publishes a list of occupations that customarily and regularly receive tips. Tips that you receive in an occupation that isn't on the list aren't qualified tips.
Tips that don't qualify
The following tips aren't qualified tips:
Tips that you receive as a self-employed individual in a Specified Service Trade or Business (SSTB).
Tips that you receive as an employee of an SSTB.
Tips that you receive for performing illegal activity.
Payments from a payor that employs you or in which you have an ownership interest.
Service charges that the payor adds to a bill, unless the customer can choose not to pay or can change the amount without consequence.
Non-cash items, such as event tickets or meals.
Tip agreement programs
Tips that you report under a Tip Rate Determination Agreement (TRDA) program or a Gaming Industry Tip Compliance Agreement (GITCA) program are qualified tips. This applies only if you're otherwise eligible for the deduction.
Deduction amount and requirements
The following limits and requirements apply to the qualified tips deduction:
The maximum deduction is $25,000 a year.
If you're self-employed, the deduction can't be more than your net income from the trade or business in which you earned the tips.
The deduction is reduced when your modified adjusted gross income (MAGI) is over $150,000, or over $300,000 on a joint return.
The deduction applies to tax years 2025 through 2028.
You include a Social Security number (SSN) on your tax return.
If you're married, you file a joint return.
Your tips appear on Form W-2, Form 1099-NEC, Form 1099-MISC, or Form 1099-K, or you report them on Form 4137. For the tax year, the IRS provides transition relief for taxpayers and for employers. If you aren't sure how to report your tips, ask your employer.