Tips are Deductible in 2025 – What you need to know!

Tip Deduction for 2025?  What you need to know!

WHO qualifies?: Employees and self-employed workers in occupations that customarily
and regularly received tips on or before 12/31/2024 (IRS has a list of occupations you
need to be on the list). Self-employed or employees in a financial, legal or consulting
type profession are not eligible. Must include SSN; if married, file jointly to claim.

WHAT counts?: Voluntary cash/charged tips from customers, including tip-sharing.
Mandatory service charges (e.g., automatic 18%) don’t qualify

Things to Consider: 

1.  Deduction cap + phaseout: Up to $25,000 per return per year; phase-out reduces the
   deduction by $100 for each $1,000 of modified AGI over $150,000 ($300,000 joint).
2. Self-employed: limited to net profit of that trade/business (before this deduction).
3. Payroll tax reminder: Tips are still subject to FICA/Medicare. Employees must report
   tips; employers must withhold/pay FICA on reported tips. The new deduction does not
   change payroll tax rules
4. Reporting changes: Form W-2 will include total cash tips reported and the worker’s
   occupation; IRS is phasing in reporting for 2025. Workers can claim the deduction
   whether or not they itemize.
5. Keep records: Maintain a daily tip log and supporting slips/POS reports; oral statements
   aren’t enough.
6. Employer credit unchanged: Restaurants and other eligible businesses can still claim the
   FICA tip credit under § 45B (general business credit).
7. Occupation list: Treasury/IRS proposed nearly 70 tipped jobs (e.g., servers, bartenders,
   bell staff, stylists, caddies, tour guides). Final list to follow; rely on IRS updates.
8. Tip: To reflect this deduction in 2025 withholding, submit a new W-4 using the IRS 2025
   Deductions Worksheet