The no tax on tips deduction, for tax preparers

Qualified tips are deductible up to $25,000 a year, and the deduction shrinks once modified AGI passes the limit (over $150,000 ($300,000 joint)). It is a below-the-line deduction claimed on the new Schedule 1-A, so a client who takes the standard deduction still gets it.

A self-employed client cannot deduct more than the net income of the business where the tips were earned. Anyone working in a specified service trade or business, the same list used for the QBI deduction, does not qualify at all.

Sort your client list for anyone with tip income on a W-2, a 1099 or Form 4137, then check three gates for each one.

• The occupation is one Treasury lists as customarily receiving tips (final regulations were issued in April 2026).
• The client and, on a joint return, the spouse have a valid SSN. Married couples must file jointly to claim it.
• Income is under the phase-out start, or far enough over it that you need to compute the reduction.

For 2025, the IRS waived penalties on employers that did not report tips separately, so many W-2s will not show a clean figure. Ask for pay stubs, the employer tip report or the client’s own daily tip log, and keep it in the file. The IRS issued separate guidance on how individuals work out 2025 amounts when the forms are silent.

Self-employed tipped workers need books that separate tip income from fees, because the cap is tied to net business income. That split is far easier to show from a ledger kept during the year than from bank statements in March.

In HelloBooks, give tip income its own income account for self-employed clients so the year-end figure is a report, not a reconstruction. The AI categorises bank deposits as they arrive and sends anything it is unsure about to your review queue, so cash tips deposited in batches still land in the right place.