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No tax on tips (2025-2028): what tip records servers should keep

Updated October 29, 2026 · 7 min read · Also in Spanish

Short answer: "No tax on tips" is a federal income tax deduction of up to $25,000 a year of qualified tips, for tax years 2025 through 2028, claimed on Schedule 1-A of Form 1040. It applies to tips that were reported on a W-2 or 1099, or reported by the worker on Form 4137. The records that matter are your daily tip record (date, cash tips, card tips, tip-outs paid and to whom), your monthly reports to your employer, your W-2 (box 7), and any Form 4137. Payroll taxes on tips still apply.

This page describes public IRS guidance. It is not tax advice and does not say whether you qualify. Last checked: 2026-10-29.

What the deduction is

The One Big Beautiful Bill Act (signed July 4, 2025) created a deduction for "qualified tips". According to the IRS:

• The maximum annual deduction is $25,000.
• It phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
• It applies to tax years 2025 through 2028.
• Employees and self-employed individuals may deduct qualified tips received in certain occupations that customarily and regularly received tips.

Source: IRS Tax Tip 2026-06 and the IRS CP321P notice page.

The name is misleading in two ways. First, it is a deduction from income subject to federal income tax, not an exemption from all tax; Social Security and Medicare taxes on tips still apply, because the final regulations state that the deduction does not apply for FICA or self-employment tax purposes (TD 10044). Second, it covers only "qualified" tips, defined below. The final regulations also require a Social Security number on the return and, for married taxpayers, a joint return (TD 10044, Federal Register, April 13, 2026).

What counts as a qualified tip

The IRS defines qualified tips as "voluntary cash or charged tips received from customers or through tip sharing" (IRS Tax Tip 2026-06). The final regulations add detail (TD 10044):

• The tip must be paid voluntarily, without consequence if the customer does not pay, and not subject to negotiation; the customer decides the amount.
• "Cash" includes cash, checks, credit and debit cards, gift cards and mobile payment apps.
• Automatic gratuities, service charges and other mandatory amounts added to a bill are not qualified tips, even when the employer pays them out to staff. A charge the customer is expressly allowed to reduce to zero is treated as voluntary.
• Tips received through a tip pool or tip-sharing arrangement are qualified tips for the person who receives them. Amounts a manager or supervisor receives from a pool are not.

The tips must be in an occupation on the Treasury list of occupations that customarily and regularly received tips on or before December 31, 2024. The "Beverage and Food Service" group of that list includes bartenders (code 101), wait staff (102), non-restaurant food or beverage servers (103), dining room and cafeteria attendants and bartender helpers (104), chefs and cooks (105), food preparation workers (106), fast food and counter workers (107), dishwashers (108), restaurant, lounge and coffee shop host staff (109) and bakers (110) (IRS occupation list). The final regulations refined some categories and added others; the IRS directs taxpayers to the list in the regulation or on IRS.gov (IRS, occupation list and amended returns).

Which records the IRS already expected you to keep

None of this is new. IRS Publication 531 says an employee who receives tips must keep a daily tip record showing, for each workday:

• cash tips received directly from customers or other employees;
• credit and debit card tips the employer paid you;
• the value of noncash tips such as tickets or passes;
• amounts paid out to other employees through tip pools or tip splitting, and the names of those employees.

Publication 531 also says that Forms 4070 and 4070A, the old IRS tip report and daily log, are historical. It does not require a specific form: a tip diary, copies of documents such as card charge slips, or an employer's electronic system (with a paper copy you keep) can serve as the record.

Monthly, employees report tips (cash, check, debit and credit card tips) to the employer by the 10th of the following month, unless tips from that job in the month were under $20 (IRS tip recordkeeping and reporting; Publication 531). You report only the tips you keep, not the part passed to other employees (Publication 531).

Tips that were not reported to the employer are reported on Form 4137, which calculates the Social Security and Medicare tax on them (IRS). Publication 531 notes a penalty equal to 50% of those taxes for tips not reported to the employer, unless there was reasonable cause.

How the deduction connects to those records

The deduction can only be claimed on tips that appear on a Form W-2, Form 1099 or other statement furnished to you, or that you report yourself on Form 4137 (IRS Tax Tip 2026-06). In practice that means:

1. Tips you reported to your employer each month flow into your W-2 (box 7, social security tips, and box 1 wages).
2. Tips you did not report to your employer only count if you put them on Form 4137.
3. Your daily tip record is what supports both numbers, and what lets you check the W-2 against reality.

Tax year 2025 was a transition year. Employers and other payors were given penalty relief for not separately reporting cash tips and the recipient's occupation on 2025 information returns (IRS IR-2025-110, Notice 2025-62). Under Notice 2025-69, employees could use the social security tips in W-2 box 7, the amounts they reported to the employer, or a voluntary box 14 figure to determine 2025 qualified tips; non-employees could rely on receipts, point-of-sale reports and daily tip logs (summary by Forvis Mazars). Whichever figure is used, a daily tip record is what lets a worker check it against what actually happened on each shift.

The IRS is reviewing Schedule 1-A claims: notice CP321P is sent when the IRS believes a tips or overtime deduction may be too large and asks the taxpayer to check and amend if needed (IRS CP321P).

A record-keeping checklist (facts, not advice)

Items the IRS material above refers to, gathered in one list:

• Daily tip record for each shift: date, cash tips, card tips, noncash tips, tip-outs paid and to whom.
• Monthly totals of cash tips kept, per job, and copies of what you reported to each employer.
• A note of any service charges or automatic gratuities you received, kept separate from tips.
• Your W-2 for each job (box 1, box 7, box 8 allocated tips if any, box 14 if the employer used it).
• Form 4137 if you filed one.
• Your Schedule 1-A and the return it was filed with.

The IRS general rule is to keep records that support an item on a return until the period of limitations for that return runs out, which is three years in the common case (IRS, How long should I keep records).

Goodhands Tip Tracker, a free Android app, produces the first two items (a daily tip record and monthly and yearly summaries, as PDF or CSV) from one typed line per shift. It does not calculate the deduction or determine eligibility.

FAQ

Does "no tax on tips" mean no taxes are withheld from my tips?

No. The IRS describes it as a deduction with a $25,000 annual maximum that reduces income subject to federal income tax. The final regulations state that the deduction does not apply for FICA purposes, so Social Security and Medicare taxes on reported tips continue to apply (IRS Tax Tip 2026-06; TD 10044).

Do cash tips I never reported count?

Only tips reported on a W-2 or 1099, or reported by you on Form 4137, can be included (IRS Tax Tip 2026-06).

Does the automatic 18% on large parties count?

The final regulations say mandatory service charges and automatic gratuities are not qualified tips, even if paid out to employees (TD 10044).

Do tips I receive from the tip pool as a busser or barback count?

The IRS defines qualified tips to include tips received "through tip sharing" (IRS Tax Tip 2026-06), and the final regulations confirm pool and tip-share amounts for employees, except amounts received by managers or supervisors (TD 10044).

Which form do I use?

The IRS states that qualified tips are reported on Schedule 1-A (Form 1040) and points to the Schedule 1-A instructions in the Form 1040 instructions (IRS).

Not tax advice. This page quotes IRS and Federal Register material as of the date above; rules and forms can change, and your situation may differ. For decisions about your return, use the IRS instructions or a tax professional. Goodhands Apps is not affiliated with the IRS.

Guides describe public information and are not tax advice. Goodhands is not affiliated with the IRS.