With the new “No Tax on Tips” provision,
many taxpayers are asking an important question: What tips actually qualify? The IRS has released FAQs and guidance to help clarify eligibility, but once you determine your tips do qualify, the next question becomes:
How do you actually remove them from your taxable income?
A New Form (and a Not-So-Simple Return)
Back in 2017, the Tax Cuts and Jobs Act (TCJA) promised a simplified, “postcard-sized” tax return designed to save time and reduce complexity. Fast forward to 2025, and that postcard has grown back into a two-page Form 1040, plus up to nine additional schedules, depending on your situation.
One of those new forms is Schedule 1-A.
What Is Schedule 1-A?
Schedule 1-A is used to report deductions for several new categories of income.
These include:
- Qualified Tip Income
- Qualified Overtime
- Qualified Car Loan Interest
- Enhanced Deduction for Seniors
For tipped employees, this is where the qualified tip income deduction is calculated.
Important: You are responsible for ensuring that:
- Your tips are qualified, and
- Those tips were included in your gross income to begin with.
In the food service industry especially, many employees underreport tip income. If tips were not originally reported as income, you cannot later claim a deduction for them.
How the Tip Deduction Flows to Your Tax Return
After completing Schedule 1-A:
- Line 13 calculates your qualified tip deduction
- That amount flows to Page 2 of Schedule 1-A
- Then transfers to Form 1040, Page 2, Line 13b
This deduction reduces your taxable income, not your wages reported by your employer.
Key Things to Keep in Mind
Before assuming you’ll see a tax savings, consider the following:
- State taxes may still apply.
This deduction does not automatically carry over to your state return. For example, Indiana does not allow this deduction, meaning tip income is still taxable at the state level. - Not all tips qualify.
You must verify that your tips meet IRS requirements to be deductible. - Withholding may not change automatically.
This is a deduction from income, not an exclusion from wages. If you do not update your Form W-4 to account for estimated tip income, your employer will continue withholding federal income tax on those tips throughout the year. - Social Security and Medicare taxes still apply.
This is a deduction from Income, it does not impact the Social Security or Medicare taxes that you pay each year.
Need Help Navigating the Changes?
The new rules and forms add complexity—and mistakes can be costly. If you have questions about qualified tip income, Schedule 1-A, or how these changes affect your tax return, we’re here to help.
