While the title of this is a little misleading, there is a new deduction for tips starting in tax year 2025. Here are some details to consider to see if you qualify:
- The tips must be voluntary (i.e. an automatic 18% gratuity applied for ‘large parties’ at a restaurant do not count)
- The deduction is available for both employees and self-employed folks
- Self-employed folks in a “SSTB” (Specified Service Trade of Business) are NOT eligible.
- Employees whose employers are an SSTB are also not eligible.
- SSTB’s include fields like healthcare, performing arts, and athletics
- The IRS has published a list of occupations that customarily & regularly receive tips, some of the common ones are:
- Bartenders, wait staff, servers, food preparation workers
- Gambling dealers, booth cashiers
- Dancers, musicians, entertainers, performers, digital content creators
- Bellhops, hotel desk clerks, concierges
- Maids, landscaping workers, electricians, plumbers
- Event planners, photographers
- Nannies, babysitters, and pet caretakers
- Massage therapists, barbers, hairdressers, cosmetologists
- Tattoo artists, makeup artists, tailors
- Travel guides, valets, rideshare drivers
- Good delivery, charter bus drivers
- Check out the full list at: Tipped Occupations – detailed
- The maximum annual deduction is $25,000 (any filing status)
- oFor self-employed folks, the deduction cannot be greater than their net income from the business where tips were earned.
- Income limits/phase outs apply. The deduction will start to phase out at incomes over $150,000 (or $300,000 for married filing jointly filers).
If you have any questions about this or any other tax topics, drop us an email at hello@pennypinchtax.com