on Tips
A new federal law gives tip-earning bartenders a major deduction. Here’s everything you need to know to take full advantage of it.
Applies to 2025 · 2026 · 2027 · 2028 Tax Years | Expires December 31, 2028 (Unless Extended)
This is a new deduction — not an exemption. You still report all tips as income, but you can deduct up to $25,000 from your taxable income.
Covers occupations where tips are customary — generally all positions currently classified as tip-earning. Does not apply to kitchen staff or non-tip positions.
This law does not change Social Security or Medicare taxes. Your full credits for retirement and disability benefits are unchanged.
If you are married, you must file a joint return to claim any tip deduction. Married filing separately = $0 deduction. Nevada Domestic Partners each file separately and can each claim up to $25,000.
Includes tip-outs and tip shares. Does NOT apply to automatic gratuities — those are classified as wages, not tips.
No records, no logs, no allocation = no deduction. Keep your tip logs. Continue reporting tip income. Get and keep your 2025 paystubs.
You do not have to itemize deductions to claim this. It is not a miscellaneous itemized deduction — it’s a straightforward above-the-line deduction.
Reduced if your adjusted gross income exceeds $150,000 (single) or $300,000 (married/joint). Most bartenders will qualify for the full deduction.
What You Can Deduct on Tips
- Single person: deduct up to $25,000 in tips
- Married joint return: one $25,000 deduction per couple (either spouse’s tips count)
- Nevada Domestic Partners: each can claim up to $25,000 separately
- Applies to cash and credit card tips
- Applies to pooled tips and tip-outs (tip shares)
- Can use allocated tips if in a Tip Compliance Program
- Does NOT apply to automatic gratuities (classified as wages)
- IRS accepts: W-2 Box 7, Form 4070, Form 4137
- Starting 2026: employers must report tip amount and job classification
Key rule: You must be able to show your eligible classification and that your deduction amount is correct. Keep your tip logs — always.
No Tax on Overtime Too
- Overtime is also NOT tax-free — it is a new deduction
- Effective retroactive to January 1, 2025
- Single person: deduct up to $12,500 in overtime
- Married joint return: deduct up to $25,000 combined
- Deduction is for the amount of wage that exceeds regular pay
- Example: $30/hr regular, $45/hr overtime rate = $15 per hour is deductible
- Married filing jointly can stack: either spouse can earn the overtime
- Do NOT have to itemize to claim
- Deduction reduced if income exceeds $150K single / $300K joint
- Starting 2026: employers must provide overtime information
For 2025: IRS accepts reasonable effort to determine overtime deduction — but make sure you can show how you computed it. Keep your records.
Continue keeping tip records every shift. Members must be able to show their eligible classification and that the deduction amount is correct. No log = no deduction.
Save every paystub from 2025 for your tip and overtime information. Keep them with your tax records. Your 2025 W-2s will NOT reflect these new law changes.
Tip reporting and allocation systems are NOT changing. Continue reporting tip income if self-reporting. The law changes your deduction — not your reporting obligation.
Confirm with your employer that your job classification is listed as a tip-earning position. Review any changes to withholding tables when made by your employer.
You MUST file jointly to claim any tip or overtime deduction. Married filing separately gets $0. This is one of the most important rules — don’t miss it.
The Culinary and Bartenders Legal Service Fund is hosting free workshops at the Bartenders Union to answer your questions. See dates below.
W earns $20,000 in tips. H also earns $20,000 in tips. They file a joint return. The couple gets one $25,000 deduction — not $50,000. Joint return required.
Same couple as above, but each files a married separate return. Each gets $0 deduction. Joint return is required for married persons to get any deduction at all.
W earns $5,000 net overtime. H earns $20,000 net overtime. Filing jointly — can they deduct up to $25,000 for both? Yes. If joint return filed, couple has the combined $25,000 limit. “Net” is the difference between regular and overtime rates.
The Culinary and Bartenders Legal Service Fund is hosting free workshops on tip and overtime questions on tax returns. Held at Bartenders Union, 4825 W. Nevso Dr., Las Vegas at 10:00 a.m. and 3:00 p.m.
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