What gig workers and employees who get tips need to know about the new no-tax-on-tips tax break
- Written by Annette Nellen, Professor of Tax and Accounting, San José State University
About 1 in 10 American workers[1] are earning a living as a gig worker[2]. That means they find their customers through Lyft, DoorDash, TaskRabbit and other digital platforms, or do another form of what the IRS and others call “on-demand work[3].”
As a certified public accountant, attorney and tax professor[4], I study how new tax rules affect businesses and individuals, as well as the complexities that narrowly tailored tax breaks that apply to only certain groups of taxpayers bring about.
The big tax reform package that President Donald Trump signed[5] into law in July 2025 included two changes that affect many gig workers. One is a new tax break on money that workers earn through tips[6], whether they are self-employed or work as an employee. The other is a change to the rules guiding the information that gig workers and the IRS must receive about how much workers earn from platforms like Uber.
Maximum deduction is $25,000
Trump promised a new tax deduction for tips[7] during his 2024 presidential campaign. Former Vice President Kamala Harris, his opponent, echoed that pledge[8], but she paired it with a pledge to double the federal minimum wage to US$15 an hour.
This new deduction allows up to $25,000 in tip income[9] to be subtracted from a worker’s taxable income during the 2025, 2026, 2027 and 2028 tax years. The new tax break can provide significant savings for some employees and self-employed people.
The savings will vary widely depending on income.
For example, a tipped worker in the 24% tax bracket[10] eligible for the maximum $25,000 tip deduction would save $6,000 on their yearly tax bill. People who earn less and are in a lower tax bracket, and who earn less in tips than the maximum deduction allowed, would not save as much.
An example of that would be a tipped worker in a 12% tax bracket who earns $7,000 through tips. They would save only $840 on their taxes after deducting their tip income. But this is a savings other workers who earn the same amount of income – but without any of it in tips – will not receive.
The new tax break is computed and reported on a new federal form, Schedule 1-A, Additional Deductions[11].
House Republicans estimate that this tax break will, on average, save tipped workers $1,300[12] a year.
Rules and regulations
As with all tax breaks, there are lots of rules in place that can determine if someone is eligible for a deduction, and if so, how big.
Only restaurant servers, barbers, house cleaners, babysitters and other workers in occupations where tips are customary are eligible for the tip-related tax break. As required by Congress, the IRS created a list of traditionally tipped occupations[13]. It includes rideshare drivers, pet sitters and several others.
Customers must have voluntarily paid all tax-deductible tips.
That means if a gig worker or their employer computes a tip amount and requires customers to pay it, that tip isn’t tax-deductible. Also, the tip must be paid in cash or by credit, debit or gift card.
Tips paid with cryptocurrency, lottery tickets or any other form of property don’t generate a tip deduction.
Tips must be reported to the workers and IRS
Self-employed people will need to confirm they received a 1099 form and that their tip income is included in the total income shown on that form. For 2025, they will need to use their own records to determine how much tip income they earned, only counting tips that customers voluntarily paid. Gig workers should be able to find this detail in the records the platform company keeps in the worker’s online account.
Gig workers who find customers through online platforms usually receive a Form 1099-K[15] from those companies, which shows the total amount charged to all customers – including tips – before the platform company’s fee is subtracted.
For 2025, employers and platforms that issue 1099 forms[16] to gig workers do not have to separately show the tip income on the 1099 forms. But they will need to do so in 2026, 2027 and 2028.
An exception to the new rule
Self-employed workers need to be aware of a restriction on the new no-tax-on-tips rule: You can’t deduct so much in tips from your taxable income that it results in a loss for your business.
Many self-employed people do earn enough income to get the $25,000 maximum tip deduction, assuming they have at least $25,000 of qualified tip income. But others with high expenses relative to what they earn may not be able to deduct all of their tip income.
Another restriction that some tip earners may soon face is that they can’t earn tips in what Congress calls a “specified service trade or business[17],” such as performing arts or a business where the reputation or skill of the owner is a significant aspect of the business.
For example, a self-employed pianist who gets tips when they play at a bar still has to pay tax on their tips as was required for everyone prior to 2025 – no tip deduction.
The IRS plans to issue more details on this restriction in 2026, but in the meantime, it can be ignored for 2025[18], and that hypothetical pianist can deduct the tips they earned in 2025 up to $25,000.
Here are three more caveats:
Only workers who have Social Security numbers can deduct tips from their taxable income.
Married workers must file as married filing jointly, rather than separately.
Finally, single people with incomes over $150,000 and married couples earning more than $300,000 will see their tip income deduction phase down.
New reporting thresholds
Gig workers are also affected by another change in the tax and spending package of 2025.
As noted earlier, Form 1099-K is the typical reporting form gig workers receive from platforms that handle the collection of payments from customers and transfer the worker’s share to them. As of 2025, the gig work company only needs to issue the form to the worker and to the IRS if they processed payments for the worker that exceeded $20,000 and involved more than 200 transactions.
Before 2025, these companies, as well as payment systems like Venmo and PayPal, were required to issue the 1099-K form if over $600[19] of payments were processed for the sale of goods and services, regardless of how many transactions occurred.
A few states set the thresholds for issuing a 1099-K form[20] below what the federal government mandates. For example, workers making at least $600 through a platform in Maryland and Virginia must be issued a 1099-K.
Uber, Lyft and other platforms can voluntarily issue a Form 1099-K that has a total of the income the worker earned that’s below the filing threshold. Because a tip income deduction is only allowed if the tips are reported on a 1099 form, it is likely that platform companies will issue the forms to all gig workers who found work through them so the workers can claim the tip deduction.
What’s staying the same
To be sure, some things have not changed for gig workers. Because they are self-employed, they can deduct what they spend on their businesses[21], such as software subscriptions and travel, to lower their taxable income – reducing what they spend on taxes.
But unlike employees who pay income taxes throughout the year through payments their employers withhold from every paycheck to cover their federal income, Social Security and Medicare taxes[22], self-employed Americans must compute and make quarterly estimated tax payments[23].
Also, self-employed workers can still claim a deduction for the miles they drive for work, which rose from 70 cents per mile in 2025[24] to 72.5 cents in 2026[25]. Additional tax deductions for the self-employed include any insurance needed to cover their business, and some retirement plan options[26].
Many gig workers will find that their state income tax bills mostly stay the same. That’s because some states, such as California[27] and Massachusetts[28], don’t allow the deduction of income from tips on state income tax returns.
Like most tax breaks, the new deduction for tips can be more complicated than you might expect, particularly for self-employed people. But the IRS does offer some resources[29] that can help gig workers, and others eligible to claim it, compute what they can or can’t deduct from their taxable income – at least until tax rules change again.
References
- ^ 1 in 10 American workers (gigeconomydata.org)
- ^ earning a living as a gig worker (www.uschamber.com)
- ^ on-demand work (www.irs.gov)
- ^ tax professor (www.sjsu.edu)
- ^ tax reform package that President Donald Trump signed (www.irs.gov)
- ^ new tax break on money that workers earn through tips (www.irs.gov)
- ^ Trump promised a new tax deduction for tips (www.fidelity.com)
- ^ opponent, echoed that pledge (www.crfb.org)
- ^ up to $25,000 in tip income (www.irs.gov)
- ^ 24% tax bracket (www.irs.gov)
- ^ Schedule 1-A, Additional Deductions (www.irs.gov)
- ^ save tipped workers $1,300 (waysandmeans.house.gov)
- ^ IRS created a list of traditionally tipped occupations (www.irs.gov)
- ^ Brandon Bell/Getty Images (www.gettyimages.com)
- ^ usually receive a Form 1099-K (www.irs.gov)
- ^ employers and platforms that issue 1099 forms (www.irs.gov)
- ^ specified service trade or business (www.irs.gov)
- ^ can be ignored for 2025 (www.irs.gov)
- ^ required to issue the 1099-K form if over $600 (blog.taxact.com)
- ^ few states set the thresholds for issuing a 1099-K form (support.waveapps.com)
- ^ deduct what they spend on their businesses (finance.yahoo.com)
- ^ Social Security and Medicare taxes (www.irs.gov)
- ^ quarterly estimated tax payments (www.irs.gov)
- ^ 70 cents per mile in 2025 (www.irs.gov)
- ^ 72.5 cents in 2026 (www.irs.gov)
- ^ retirement plan options (www.irs.gov)
- ^ such as California (www.ftb.ca.gov)
- ^ Massachusetts (www.mass.gov)
- ^ IRS does offer some resources (www.irs.gov)
Authors: Annette Nellen, Professor of Tax and Accounting, San José State University