TAX NEWS
IRS Clarifies "No Tax on Tips" Deduction for Tipped and Gig Workers
New IRS guidance explains who may qualify for the “No Tax on Tips” deduction, how tip income must be reported, and why good recordkeeping matters.
By Legacy Tax Solutions Staff • September 2026
New federal tax rules may allow eligible tipped employees and certain self-employed workers to deduct qualified tip income.
KEY TAKEAWAYS
Up to $25,000 in qualified tips may be deductible.
Eligible employees and some self-employed workers may qualify.
Tip income still must be properly reported.
Income limits and other restrictions apply.
WASHINGTON — One of the most talked-about tax changes heading into 2026 is the federal “No Tax on Tips” deduction, which may allow eligible workers to deduct up to $25,000 in qualified tips from taxable income for tax years 2025 through 2028.
The deduction may apply to employees and certain self-employed workers in occupations where tips are customarily and regularly received. Restaurant servers, bartenders, hospitality workers, salon professionals and some gig-economy workers are among those who may qualify.
But the phrase “No Tax on Tips” can be misleading. Workers still need to report their tip income properly. The new law creates a deduction for qualified tips; it does not make tip income disappear from tax reporting.
For employees, qualified tips generally need to appear on an appropriate tax form or be otherwise properly reported. Self-employed workers may also qualify, although their deduction generally cannot exceed the net income from the trade or business in which the tips were earned.
Recordkeeping will be especially important. Workers should keep track of tip income, review Forms W-2 or 1099, and maintain records that can support the deduction if questions arise later.
The benefit also has income limits, meaning higher-income taxpayers may receive a reduced deduction or may not qualify for the full amount.
For many tipped workers, the new provision could provide meaningful tax savings. The key is understanding the requirements before filing season arrives rather than trying to reconstruct records at the last minute.
The takeaway: report accurately, keep good records and know the rules before claiming the deduction.
