About three or four times a year, a client will offer a tip to Bill Nemeth for his work on their tax return.
“I tell them there’s no need to tip me, but if they insist I’ll accept it,” said Nemeth, past president and education chair of the Georgia Society of Enrolled Agents. “But I always include it in income, since my profession is not one that ‘customarily and regularly receives tips.'”
Under the new One Big Beautiful Bill Act, qualified tips are any cash tip received by an individual in an occupation that ‘customarily and regularly’ received tips on or before Dec. 31, 2024. They include tips received from customers that are paid in cash or charged.
MARGARET JOHNSON/MargJohnsonVA – stock.adobe.com
Nemeth offered the example of a member of the waitstaff at a restaurant where the amount in controversy was the “tip out,” which is the amount the waitstaff shares with people they depend on to do their job — busboys, valet car parkers, bouncers, bartenders, etc.
“For example, if the bartender doesn’t get a share, the waitress may have to wait a half an hour to get her customer his order,” he explained. “And the more the waitress can get her customer to drink, the looser he may be with tips.”
Of the $2,000 a waitress typically collects each evening, she usually takes home about $700, with the rest going to her helpful colleagues.
“The profession rewards the good-looking, aggressive ones well,” according to Nemeth. “The high earners want to buy a house, and they have to show income. If it’s all cash from tips, it’s not on record, and they want it to be on the record. So they welcome tips paid with credit cards.”
According to tax professional Ryan Reichert, qualified tips must be included on one of these three forms furnished to the individual to be eligible for the deduction:
- Form 1099-NEC, “Nonemployee Compensation;”
- Form 1099-K, “Payment Card and Third-Party Network Transactions;” and,
- Form W-2.
Alternatively, employees can report qualified tips on Form 4137, “Social Security and Medicare Tax on Unreported Tip Income.”
The deduction is for qualified tips of up to $25,000 per year. It does not reduce adjusted gross income, but it does reduce taxable income. It is not an itemized deduction and applies to tax years 2025-2028, according to Reichert.
Qualified tips must be paid voluntarily without any consequence in the event of nonpayment, not subject to negotiation, and determined by the payor. They also do not include amounts received in the course of a Section 199A specified service trade or business.
The amount allowed as a deduction after applying the $25,000 limit is reduced, but not below $0, by $100 for each $1,000 that the taxpayer’s modified AGI exceeds $150,000 ($300,000 on a joint return).
To file for the deduction, the taxpayer must have a valid Social Security number. Married taxpayers must file a joint return to claim the deduction. But, according to Reichert, legally married taxpayers are not considered married if they file a separate return and maintain a household for more than half of the tax years, which is the principal place of abode of a child that they can claim as a dependent; if they furnish over one-half of the cost of maintaining the household during the tax year; and if their spouse is not a household member during the last six months of the tax year.
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