The One Big Beautiful Bill Act (OBBBA) created a personal deduction for tips received by workers in specified industries. The deduction is primarily for employees who receive tips in the normal course of their business activities, such as bartenders and masseurs. But many self-employed individuals receive tips, and they may be eligible for the deduction. There are several conditions to consider.
Basic tips deduction rules
The no-tax-on-tips deduction is a write-off of up to $25,000 on Form 1040 or 1040-SR.
- It can be claimed by individuals whether using the standard deduction or itemizing personal deductions.
- It does not affect the amount of adjusted gross income; it is subtracted from adjusted gross income.
- There is an income limit for claiming the deduction. The deduction phases out for individuals with modified adjusted gross income (MAGI) above $150,000 (or $300,000 in the case of a joint return).
- Tips must be “qualified.” This means they are voluntary payments made in cash.
Special rule for self-employed individuals
For self-employed individuals, only tips reported on Form 1099-NEC (box 1); Form 1099-MISC (box 3), or Form 1099-K (box 1a) can be taken into account. This means that while home service contractors working for Angi or drivers for Uber may get a 1099-K if there are sufficient payments and transactions, many self-employed individuals likely will fall below the threshold for the information return and won’t be able to deduct their tips because there won’t be any reporting to the IRS on an information return.
Eligible industries
Only tips in occupations that customarily and regularly receive tips can qualify for the deduction. Proposed regulations issued in September 2025 list nearly 70 occupations that fall within 8 categories:
- Beverage and food service
- Entertainment and events
- Hospitality and guest services
- Home services
- Personal services
- Personal appearance and wellness
- Recreation and instruction
- Transportation and delivery
Note: Each eligible occupation—a TTOC Occupation Title—has an occupation code. The code won’t be used on the 2025 return, but will be required for the 2026 return.
Exclusion for SSTBs
The law specifically bars a deduction for tips received in the course of a trade or business that is a specified trade or business (SSTB). These include any trade or business:
- Involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or
- That involves the performance of services consisting of investing and investment management, trading, or dealing in securities.
Net income limitation
For self-employed individuals, qualified tips are taken into account only to the extent that the gross income from a trade or business (including such qualified tips) exceeds the sum of the deductions allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.
For example, say a self-employed barber has $85,000 of income of which $25,000 is qualified tips. The barber’s expenses are $65,000. Because net income is $20,000 ($85,000 – $65,000), only $20,000 of the $25,000 in tips is eligible for the deduction.
Impact on the QBI deduction
Qualified business income (QBI) for purposes of the 20% personal deduction based on business income must be reduced by the deduction for tips received in the course of a trade or business. This treatment for QBI purposes is similar to the reduction required for “above-the-line deductions” for self-employed individuals for health insurance premiums, retirement plan contributions, and one-half of self-employment tax.
No impact on self-employment tax
Because the tips deduction is subtracted from adjusted gross income and is not deducted from business income, it does not reduce self-employment tax.
Final thoughts
If eligible, take advantage of the tips deduction now, because it only runs for 4 years (through 2028)…unless Congress extends it.
The tips deduction for self-employed individuals is claimed on line 5, Part II, of Schedule 1-A, which is part of Form 1040 or 1040-SR. If your return is prepared by a tax professional or you DIY with tax software, the tips deductions will automatically populate the return correctly with the information provided.
Additional resources for the self-employed can be found in this list of blogs.
