The Internal Revenue Service released new guidance on Monday for taxpayers seeking to claim the “No Tax on Tips” deduction, a signature policy initiative from the Trump administration that was incorporated into last year’s One Big Beautiful Bill Act. The publication of Schedule 1-A provides clarity for millions of service industry workers on how to reduce their taxable income for the 2025 tax year.
The deduction represents a significant shift in tax policy, fulfilling a campaign promise that resonated broadly with voters in the 2024 election. According to the Newsweek report, the concept garnered bipartisan appeal, with Democratic candidate Kamala Harris also expressing support for eliminating federal income tax on tips during the hotly contested race. The provision, however, is temporary and will only apply to tax years 2025 through 2028.
Who Qualifies for the Tip Deduction
The newly released Schedule 1-A includes a specific section, Part II, dedicated entirely to the “No Tax on Tips” deduction. Tax professionals and eligible workers will need to familiarize themselves with this form to properly claim the benefit. The IRS has defined a broad range of occupations that qualify, spanning eight categories including Beverage and Food Service, Hospitality and Guest Services, Personal Appearance and Wellness, and Transportation and Delivery. This means waiters, bartenders, hairdressers, taxi drivers, personal trainers, and gig economy workers may all be eligible.
According to the IRS definitions outlined in the article, qualified tips must be cash payments made voluntarily by customers without negotiation. There are also specific legal stipulations; tips received for services that constitute a felony or misdemeanor, including sex work and pornographic activity, do not qualify. Interestingly, the guidelines state that working for an establishment that violates the law does not automatically disqualify an employee’s tips, such as a waiter receiving tips at a restaurant operating without a proper liquor license.
How the Deduction Works and Its Limitations
Eligible taxpayers can deduct up to $25,000 per year in qualified tips, though self-employed individuals cannot deduct more than their net income from the business in which the tips were earned. To claim the deduction, all tips must be properly reported, and married couples are required to file a joint return. The benefit is not available to all high earners, as it begins to phase out for taxpayers with a modified adjusted gross income exceeding $150,000, or $300,000 for those filing jointly.
While the policy has been celebrated by many in the service industry, experts suggest its impact may vary. The nonpartisan Economic Policy Institute has noted that many tipped workers earn too little to benefit substantially from the deduction. Workers seeking to claim the benefit for the 2025 tax year must use the new Schedule 1-A when filing their returns, and can consult the IRS website for a complete list of qualified occupations and detailed filing instructions.
