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Key Highlights:
The One Big Beautiful Bill of America (OBBBA) has made important changes to how tips are reported on your 1040 tax return.
This guide will walk you through what's new, who benefits, and exactly how to report your tips correctly.
What Changed with Tip Reporting Under OBBBA
The OBBBA has changed how tip income is reported on Form 1040
The One Big Beautiful Bill of America made significant changes to how tip income is taxed. Before we dive into the details, here's what you need to know about the basic changes:
Key OBBBA Tip Reporting Changes
Certain service workers can now exclude a portion of their tip income from federal taxes
Overtime pay for some workers receives similar tax treatment as tips
New documentation requirements have been introduced
Form 1040 has a new dedicated line for reporting qualified tip income
These changes primarily benefit workers in the service industry who regularly receive tips as part of their income. The goal is to provide tax relief to these workers while also encouraging proper reporting of all tip income.
Who Qualifies for the New Tip Tax Benefits
Not everyone who receives tips will qualify for the new tax benefits. The OBBBA specifically targets certain service industry workers:
Qualifying Workers
Restaurant servers and bartenders
Hotel staff (bellhops, housekeeping, concierge)
Hairstylists and barbers
Taxi and rideshare drivers
Food delivery workers
Casino dealers
Qualifying Requirements
Must earn at least 20% of income from tips
Must properly report all tip income to employer
Annual income must be below $85,000 (single) or $170,000 (married filing jointly)
Must maintain required documentation
The tax benefit phases out gradually for workers with incomes approaching the upper limits. This ensures that those who need the relief most receive the full benefit, while higher earners receive a reduced benefit.
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How the New Tip Tax Benefits Work
Under the OBBBA changes, qualifying workers can exclude a portion of their tip income from federal taxation. Here's how the benefit works:
"Qualifying service workers can exclude up to 25% of their reported tip income from federal taxation, up to a maximum of $10,000 in excluded tips per year."
This means if you earn $20,000 in tips during the year, you could exclude $5,000 from your taxable income. This exclusion directly reduces your adjusted gross income (AGI), which can lead to additional tax benefits since many deductions and credits are based on your AGI.
Benefits Beyond Direct Tax Savings
The tip income exclusion can provide several additional benefits:
Potentially qualifies you for a larger Earned Income Tax Credit
May increase eligibility for certain deductions that phase out at higher income levels
Could reduce your overall tax bracket
May lower your state tax liability (in states that conform to federal tax rules)
It's important to note that while this income is excluded from federal income tax, it still counts as income for Social Security and Medicare tax purposes.
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How to Report Tips on Your 1040 Tax Return
The IRS has updated Form 1040 to accommodate the new tip income exclusion. Here's a step-by-step guide to properly reporting your tips:
Step 1: Gather All Tip Income Information
Before filling out your tax return, collect all documentation of your tip income:
Form W-2 (Box 7 shows reported tips)
Daily tip records or logs
Credit card tip receipts
Tip-out sheets showing tips shared with other employees
Step 2: Complete Form 4137 if Necessary
If you received tips that weren't reported to your employer, you must complete Form 4137 (Social Security and Medicare Tax on Unreported Tip Income):
Enter the name of each employer for whom you received tips
Report the total amount of unreported tips for each employer
Calculate the Social Security and Medicare taxes owed on these tips
Transfer the calculated tax amount to Schedule 2 of your Form 1040
Step 3: Report Tips on Form 1040
On your Form 1040, you'll need to:
Report your total tip income (both reported and unreported) on Line 1a
Report your qualified tip exclusion amount on the new Line 1b
The difference will automatically calculate on Line 1c as your taxable tip income
Important Note
The new Line 1b on Form 1040 is specifically for the qualified tip exclusion. Do not include any other types of income exclusions on this line.
Step 4: Complete Schedule 1-A for Qualified Tips
The OBBBA requires a new form, Schedule 1-A, to document your qualified tip income:
List each employer separately
Enter the total tips received from each employer
Calculate the 25% exclusion amount (up to the maximum)
Transfer the total exclusion to Line 1b of Form 1040
Required Documentation for Tip Reporting
Proper documentation is crucial when claiming the tip income exclusion. The IRS requires specific records to verify your tip income:
Document Type | What to Include | How Long to Keep |
|---|---|---|
Daily Tip Record | Date, shift worked, tips received (cash and credit), tips paid out to others | 3 years from filing date |
Employer Tip Reports | Monthly or pay period reports submitted to employer | 3 years from filing date |
Credit Card Receipts | Copies or summaries of credit card tips | 3 years from filing date |
Tip-Out Sheets | Documentation of tips shared with other employees | 3 years from filing date |
Form 4070 | Monthly tip income report to employer | 3 years from filing date |
IRS-Approved Tip Diary
The IRS recommends keeping a daily tip diary or using the IRS Publication 1244, which includes Form 4070A (Employee's Daily Record of Tips) and Form 4070 (Employee's Report of Tips to Employer).
Warning
Failing to maintain adequate tip records could result in disallowance of the tip exclusion and potential penalties if you're audited. The IRS can reconstruct your tip income based on your employer's records if you don't have your own documentation.
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Example Tax Scenarios for Tip Reporting
To help you understand how these changes might affect your tax situation, let's look at two realistic examples:
Example 1: Restaurant Server
Sarah is a full-time restaurant server who earned the following in 2025:
Base wages: $18,000
Reported tips: $32,000
Filing status: Single
Without OBBBA Tip Exclusion:
Total income: $50,000
Standard deduction: $14,600
Taxable income: $35,400
Federal tax (approximate): $4,032
With OBBBA Tip Exclusion:
Total income: $50,000
Tip exclusion (25% of $32,000): $8,000
Adjusted income: $42,000
Standard deduction: $14,600
Taxable income: $27,400
Federal tax (approximate): $3,072
Tax Savings: $960
Example 2: Married Hairstylists
John and Maria are married hairstylists who file jointly. In 2025, they earned:
John's base salary: $25,000
John's tips: $28,000
Maria's base salary: $30,000
Maria's tips: $22,000
Filing status: Married Filing Jointly
Without OBBBA Tip Exclusion:
Total income: $105,000
Standard deduction: $29,200
Taxable income: $75,800
Federal tax (approximate): $8,696
With OBBBA Tip Exclusion:
Total income: $105,000
John's tip exclusion (25% of $28,000): $7,000
Maria's tip exclusion (25% of $22,000): $5,500
Total tip exclusion: $12,500
Adjusted income: $92,500
Standard deduction: $29,200
Taxable income: $63,300
Federal tax (approximate): $7,196
Tax Savings: $1,500
These examples are simplified and don't include all possible deductions, credits, or state taxes. Your actual tax situation may vary. Always consult with a tax professional for personalized advice.
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