The OBBBA "No Tax on Tips" deduction lets qualifying tipped workers deduct up to $25,000 of tip income from federal income tax for tax years 2025 through 2028. It is a deduction, not a full exemption. Your tips are still taxed for Social Security and Medicare (the 7.65% FICA share for employees, or 15.3% self-employment tax if you work for yourself), and the deduction does not lower your adjusted gross income (AGI). You claim it on the new Schedule 1-A, whether or not you itemize.
Key takeaways:
Save this cheat sheet — the deduction cap, phase-outs, and forms in one image.
OBBBTIP is a payroll earnings code that providers such as ADP, Paychex, and OnPay use to label the portion of your tips that counts as qualified tips under the One Big Beautiful Bill Act (OBBBA). When you see OBBBTIP on a 2026 pay stub, it means your employer has flagged those tips as eligible for the "No Tax on Tips" deduction. The code is informational: OBBBTIP tips are still included in your wages and are still subject to federal income tax withholding plus Social Security and Medicare tax during the year.
The payroll code maps to two official W-2 fields for 2026 (the forms you receive in early 2027):
You use the Box 12 code TP figure to fill in Schedule 1-A when you file. If your employer runs cash tips or controlled tips through the OBBBTIP earnings code but your job is not on the IRS occupation list, the tips still will not qualify for the deduction.
OBBBA did not remove tips from income. It created a new deduction, claimed on Schedule 1-A, that you can take whether or not you itemize. Your qualified tips still appear as income on your return, but the deduction reduces your taxable income by the amount of qualifying tips, up to $25,000. Unlike a true above-the-line deduction (student loan interest or IRA contributions), the tip deduction does not reduce your adjusted gross income. It sits below the AGI line.
This means:
The savings depend on your federal income tax bracket. If you earn $25,000 in qualified tips and sit in the 22% bracket, the deduction saves you $5,500 in federal income tax. Potential savings by bracket:
| Tax Bracket | Max Deduction ($25,000) | Federal Tax Saved |
|---|---|---|
| 10% | $25,000 | $2,500 |
| 12% | $25,000 | $3,000 |
| 22% | $25,000 | $5,500 |
| 24% | $25,000 | $6,000 |
For most tipped workers earning under $150,000, the 12% or 22% bracket applies, so the annual savings run from roughly $3,000 to $5,500.
What you still owe on that $25,000 in tips: self-employment tax of 15.3% (if self-employed) or the 7.65% employee share of FICA. The tip deduction does nothing to reduce these amounts.
Not every worker who receives tips qualifies. Your occupation, your income, and how you report the tips all decide whether you can claim the deduction.
Treasury's proposed regulations list 68 occupations, grouped into eight categories, that "customarily and regularly" received tips on or before December 31, 2024. Your occupation must appear on that list.
Qualifying occupations include (partial list):
The deduction excludes employees of a Specified Service Trade or Business (SSTB). That means:
If your occupation was not one that customarily and regularly received tips before 2025, you do not qualify, even if you now receive tips through the digital tipping prompts that have spread across counter-service businesses.
The deduction phases out for higher earners:
Phase-out example (single filer). With $175,000 MAGI, you are $25,000 over the $150,000 threshold. The reduction is $25,000 ÷ $1,000 × $100 = $2,500, so your available deduction is $25,000 − $2,500 = $22,500. At $400,000 MAGI, the deduction is fully phased out.
A self-employed worker in a qualifying occupation, such as a freelance hairdresser or an independent rideshare driver, can claim the deduction too. One extra cap applies: the deduction cannot exceed your net income from the trade or business in which the tips were earned.
Example. You are a self-employed barber with $30,000 in net Schedule C income, of which $20,000 came from tips. Your deduction is limited to $20,000 (the tips actually earned), not the full $25,000 cap.
"Qualified tips" under the OBBBA must be:
Several common forms of tip-like income are specifically excluded:
This distinction matters most for restaurant workers. If your employer adds an automatic 20% gratuity to every check and distributes it to staff, those amounts are service charges, not qualified tips, regardless of what the receipt calls them.
Tips received through legitimate tip pooling or tip sharing do qualify. If front-of-house staff pool tips and split them with bussers and bartenders, the tips keep their character as "qualified tips" for everyone in the pool.
The "No Tax on Tips" deduction is a worker benefit, not an employer benefit. As a business owner, here is what changes for you:
New reporting requirements. Starting with 2026 W-2s, you must report qualified tips in Box 12 using code TP and add the employee's occupation code in Box 14b. The IRS gave transition relief for 2025, but 2026 reporting should follow the new boxes and codes.
No change to employer FICA. You still owe the employer's 7.65% share of FICA on all employee tip income. The deduction does not reduce employer payroll tax costs.
Recruitment advantage. The deduction raises take-home pay for your tipped employees. A server in the 22% bracket earning $25,000 in annual tips keeps an extra $5,500, without you spending a dime more.
For independent contractors, gig workers, and self-employed individuals in qualifying occupations:
Worked example: self-employed rideshare driver (single). Net Schedule C profit is $37,000, of which $12,000 came from tips. Self-employment tax is $37,000 × 92.35% × 15.3% = $5,227, and the tip deduction does not change it. For income tax, the $12,000 in qualified tips comes off taxable income. At a 12% marginal rate, that saves about $1,440 in federal income tax. The driver still owes the full $5,227 in SE tax on those earnings.
The deduction covers income tax only. FICA and self-employment tax still apply to every dollar of tip income. For a self-employed worker, that is still 15.3% on tips.
If your job is not among the 68 occupations on the IRS list, you cannot claim the deduction. A digital tip prompt at a counter does not put your occupation on the list.
Mandatory service charges, auto-gratuities, and delivery fees are not qualified tips, even if they are distributed to employees or land in a "tips" line on your pay stub.
If your MAGI passes $150,000 (single) or $300,000 (MFJ), your deduction starts shrinking by $100 per $1,000 over the line. At $400,000 MAGI for single filers, it disappears.
OBBBA created a separate "No Tax on Overtime" deduction (up to $12,500 single, $25,000 MFJ), also on Schedule 1-A. It covers the premium half of overtime pay, not tips. You cannot count the same dollars twice.
Most states have not conformed to the OBBBA tip deduction. Your tips can stay fully taxable at the state level even after you deduct them federally.
Claiming the tip deduction correctly means separating qualified tips from service charges and other income all year long. Jupid is an AI accountant that connects to your bank account and payment apps and categorizes transactions at 95.9% accuracy, so tip income is tagged as it lands. Ask "how much did I earn in tips this quarter?" in WhatsApp or iMessage and get an instant answer, along with a real-time estimate of both your income tax savings and the self-employment tax you still owe on those tips.
| Item | 2026 Amount |
|---|---|
| Maximum tip deduction | $25,000 |
| Phase-out threshold (single) | $150,000 MAGI |
| Phase-out threshold (MFJ) | $300,000 MAGI |
| Phase-out rate | $100 per $1,000 over threshold |
| Provision expiration | December 31, 2028 |
| W-2 reporting | Box 12 code TP + Box 14b occupation code |
| SE tax rate (still applies) | 15.3% |
| Employee FICA share (still applies) | 7.65% |
The "No Tax on Tips" deduction is a real tax benefit for qualifying service workers, but it is not the blanket exemption the name suggests. It cuts your federal income tax on up to $25,000 of qualified tips. It does not touch Social Security or Medicare, and it may not apply at the state level.
Three things to remember:
For most qualifying tipped workers earning under $150,000, the deduction is worth between $1,500 and $5,500 per year in federal income tax savings. That is meaningful money, so track your tips properly and meet every requirement to claim it.
Disclaimer
This article provides general information about the OBBBA "No Tax on Tips" deduction and should not be considered tax advice. Tax rules, income thresholds, and qualifying occupations may change as the IRS finalizes the proposed regulations. Your actual benefit depends on your occupation, income level, filing status, and tip amounts. For advice specific to your situation, consult a qualified tax professional.
Tax Year: 2026 Last Updated: July 7, 2026
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