No-Tax-on-Tips Deduction Is Now Law: Which Jobs Qualify and What the IRS Is Still Clarifying

The no-tax-on-tips deduction is no longer a campaign promise. It is law, it applies to every qualifying tip dollar you earned beginning January 1, 2025, and the IRS has now published the final rules for who qualifies and how to claim it. If you earn tips for a living and you are behind on taxes or anxious about what you owe, this deduction may change your picture in a meaningful way.

Where This Comes From

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, added new Section 224 to the Internal Revenue Code, providing an individual income tax deduction for qualified tips received by taxpayers performing services in an occupation that customarily and regularly received tips on or before December 31, 2024.

On April 13, 2026, the U.S. Department of the Treasury and the IRS issued final regulations on the No Tax on Tips provision. The final regulations became effective on June 12, 2026. Then, on August 6, 2026, the IRS released Fact Sheet FS-2026-13, substantially revising and replacing FS-2026-01, its January 2026 guidance on the qualified overtime compensation deduction. The revised guidance reflects the transition from the temporary 2025 reporting relief period to a more formal compliance regime applicable for tax years 2026 through 2028.

The bottom line: both deductions, for tips and for overtime, are now fully in effect. The grace period is over, and the rules are final.

How the Tips Deduction Works

The final regulations allow eligible workers, including both those who itemize their taxes and those who do not, to deduct up to $25,000 per year in tips as a tax deduction. That is an above-the-line deduction, meaning it reduces the income the IRS uses to calculate what you owe before any other adjustments kick in.

The deduction applies to tax years beginning after December 31, 2024, and is currently set to expire after December 31, 2028. It is not permanent. If Congress does not extend it, the benefit goes away after your 2028 return.

The deduction does phase out at higher income levels. The deduction is capped at $25,000 per return and phases out at a rate of $100 for each $1,000 by which your modified adjusted gross income (MAGI) exceeds $150,000 for single filers, or $300,000 for joint filers.

One thing that surprises many workers: the tax savings are in the form of deductions, rather than exclusions, which means tips and overtime are still subject to FICA and other employment taxes. Employees must claim the deductions on their individual tax returns.

Which 71 Jobs Qualify

With three new occupations added in the final rule, floral designers, visual artists, and gas pump attendants, the number of jobs eligible for the deduction is 71.

The list of occupations is classified by the Treasury Tipped Occupation Code (TTOC) system, comprising a three-digit code and description for each occupation. The final regulations group the occupations into eight categories. Those categories span:

• Food and beverage service: Bartenders, wait staff, food or beverage servers, dining room attendants, chefs and cooks, food preparation workers, fast food and counter workers, dishwashers, host staff, and bakers.
• Entertainment and hospitality: Gambling dealers, gambling cage workers, dancers, musicians and singers, disc jockeys, entertainers and performers, digital content creators, ushers, lobby attendants, and locker room attendants.
• Personal care and services: Hairdressers, golf caddies, and others in personal service roles.
• Transportation and delivery: Taxi drivers, and now gas pump attendants added in the final rule.
• Other service roles: The IRS expanded the list to include additional roles such as visual artists, floral designers, and gas pump attendants, signaling broader eligibility than many employers expected.

Only workers in occupations included in the IRS list are eligible to claim the deduction. If your job is not on the TTOC list, the deduction does not apply to your tips, even if tipping is common in your line of work.

What Counts as a Qualified Tip

Qualified tips are cash tips paid voluntarily by the customer and do not include service charges, mandatory automatic gratuities, or amounts paid in digital assets. Cash, checks, gift cards, and even casino chips could be qualified tips, as well as any form of electronic or mobile payment that is denominated in cash. In-kind tips that are not denominated in cash, such as event tickets, meals, services, and property, are not eligible for the deduction.

The Overtime Deduction: A Separate Benefit on the Same Form

The OBBBA also created a second deduction for overtime pay, governed by a different section of the tax code. The deduction allows eligible individuals to deduct up to $12,500 ($25,000 for joint filers) of qualified overtime compensation each year, phasing out once modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).

Qualified overtime compensation is overtime compensation paid to an individual as required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds the regular rate at which the individual is employed. In plain terms, it is the extra half of your time-and-a-half pay, not your regular wages.

The deduction is available to itemizers and non-itemizers alike, but it is a deduction, not an exclusion. Overtime pay is still fully subject to income tax withholding, Social Security, and unemployment taxes.

How to Actually Claim Both Deductions: Schedule 1-A

Neither deduction is automatic. You have to claim them on your tax return using a new form. Individual taxpayers must use Schedule 1-A to claim the deductions. This is a new schedule attached to your Form 1040, not something that existed before the OBBBA.

For the 2025 tax year, employers were not required to separately break out tips or overtime on your W-2. The IRS provided transition penalty relief for tax year 2025 to excuse the requirement that employers and other payers report qualified overtime compensation separately on Forms W-2, 1099-NEC, and 1099-MISC. See Notice 2025-62. If you did not receive a detailed breakdown for 2025, the Schedule 1-A instructions include guidance for calculating your deduction on your own.

Starting with tax year 2026, that grace period is gone. FS-2026-13 confirms that, beginning in 2026, employers must separately report qualified overtime compensation on Form W-2, Box 12, Code TT. For tips, beginning with amounts earned in 2026, employers are required to report the employee’s Treasury Tipped Occupation Code (TTOC) in new Box 14b and qualified tip amounts in Box 12 with Code TP on the Form W-2.

If your employer uses the wrong code, or leaves a box blank, it could limit the deduction you are allowed to claim. Qualified overtime compensation remains fully subject to standard federal income tax withholding, and employers may not reduce withholding on wages to account for the qualified overtime deduction unless the employee furnishes the employer an updated and valid Form W-4. Employees wishing to adjust their withholding must submit a new Form W-4 utilizing the newly updated Step 4(b) deduction worksheet or the IRS’s updated Tax Withholding Estimator.

What Is Still Being Worked Out

Even with final regulations in place, one significant question remains open. Workers employed by a business that qualifies as a specified service trade or business (SSTB) may not be eligible for the tips deduction. The OBBBA provides that qualified tips may not be received in the course of a trade or business that is an SSTB, for example health, law, accounting, performing arts, consulting, athletics, or financial services.

The final regulations do not provide any guidance regarding the SSTB rules, and the preamble confirms that the IRS intends to issue proposed regulations in the future and solicit public comments regarding the SSTB rules before publishing final regulations. Workers employed by an SSTB generally remain ineligible for the deduction, although IRS transition relief under Notice 2025-69 effectively suspends enforcement of the SSTB disqualification until SSTB-specific final regulations are issued.

What this means for you: if you work in a tipped role inside an industry like healthcare or performing arts, your eligibility may ultimately depend on guidance that has not been written yet. Until those regulations are final, the transition relief protects most workers in qualifying occupations, but the situation warrants close attention.

If You Are Behind on Taxes, This Deduction Matters Even More

For workers who already have a balance with the IRS, or who have unfiled returns sitting on the table, a legitimate deduction of up to $25,000 in tip income could meaningfully reduce the underlying tax liability that led to the problem in the first place. That affects penalty calculations, interest accrual, and your options for resolving the debt.

But getting this right requires filing correctly, and filing may also mean confronting returns you have been putting off. If that is your situation, you are not alone, and there are structured options available depending on your circumstances.

Clear Start Tax works with individuals and businesses who owe the IRS or state tax authorities, including people in tipped and hourly wage industries who may have missed deductions or fallen behind on filing. A consultation can help you understand how new deductions like this one factor into your overall tax picture and what resolution options may be available to you.