Starting in 2025, a new federal tax rule allows some workers to deduct tip income on their tax return. This change comes from a new law often referred to as the “No Tax on Tips” rule. While the idea sounds simple, the actual rules are more detailed, and not everyone who receives tips will qualify.
This article explains who can claim the tips deduction, what counts as a qualifying tip, and which industries are not eligible—using clear, non-technical language.
What Is the Tips Deduction?
The tips deduction allows certain workers to reduce their taxable income by the amount of qualifying tips they receive during the year. This can lower how much federal income tax they owe. However, tips are still subject to Social Security and Medicare taxes, so this is not a complete tax exemption.
There is a yearly cap on how much you can deduct. The maximum deduction is $25,000 per year. In addition, the deduction begins to phase out if your total income is above $150,000, or $300,000 for married couples filing jointly. If you are married and file separately, this deduction is not allowed.
What Counts as a “Qualified Tip”?
Not all tips qualify under the new law. To be eligible, the tip must meet several conditions.
First, the tip must be voluntary. This means the customer chooses to give it freely. Mandatory service charges or automatically added gratuities do not qualify.
Second, the tip must be paid in cash or through a card or app. Tips shared through a tip pool can also qualify. Non-cash items, such as gifts, do not count.
Third, the tip must be earned in a job where tipping was common before 2025. The law is meant to help traditional tipped workers, not to create new tip-based deductions in professional fields.
Fourth, the tip must be reported as income. If the tip was not included on your tax return, it cannot be deducted.
Finally—and most importantly—the tip must not be earned in certain disqualified industries.
Which Industries Are Not Eligible?
This is where many people get confused. The law specifically excludes tips earned in professional service industries, even if customers regularly tip.
If you work in healthcare, tips do not qualify. This includes doctors, nurses, therapists, chiropractors, med spas, aestheticians working in medical settings, and home health providers.
Legal professionals are also excluded. Tips paid to attorneys, paralegals, or legal consultants are not eligible.
Financial professionals do not qualify either. This includes accountants, tax preparers, bookkeepers, financial advisors, investment managers, and insurance agents.
Consultants and advisors are excluded as well. This covers business consultants, marketing consultants, IT consultants, and similar advisory roles.
Other excluded fields include architects, engineers, real estate agents, brokers, and anyone whose income is based primarily on professional expertise or reputation.
If you work for a business in one of these industries, your tips are not eligible—even if your specific role is not highly technical and even if tipping is common in your workplace.
Who Is Most Likely to Qualify?
The deduction is mainly designed for traditional tipped occupations. These typically include restaurant servers, bartenders, delivery drivers, hotel staff, rideshare drivers, barbers, hairstylists, and similar service roles. Even then, all the other rules still apply, including income limits and proper reporting.
Special Rule for 2025
Because this is a brand-new law, the IRS is allowing some flexibility for the first year. For 2025 only, if you work in a job that has historically received tips, the IRS will temporarily allow the deduction even if it is unclear whether your employer falls into a disqualified category. This relief is temporary and will end once final rules are issued.
This does not remove the need for good records. Taxpayers are still responsible for proving eligibility if asked.
Keep Good Records
If you plan to claim the tips deduction, you should keep copies of your tax forms, tip reports, pay stubs, and any tip logs you maintain. If you reported additional tips on your tax return, keep those records as well. Proper documentation is essential in case of an IRS review.
Final Thoughts
The tips deduction can be helpful, but it is not automatic and it is not for everyone. Many professionals who receive tips will be surprised to learn they do not qualify under the law. Before claiming the deduction, it is important to understand your industry, your income level, and how your tips were reported.
If you are unsure whether you qualify or want to avoid mistakes, speaking with a tax professional can help you stay compliant and avoid future issues.