What the deduction actually does
The 2025 federal law, often nicknamed no tax on tips, does not make tips tax-free. It creates a deduction from federal taxable income for qualified tips. Your tips still count as wages or self-employment income, they still show on your W-2 or 1099, and they still carry the same payroll taxes. The deduction only lowers the federal income tax you pay on them.
The deduction is taken on the new Schedule 1-A, and it is available whether you itemize or take the standard deduction.
| Tax | Federal | Massachusetts |
|---|---|---|
| Income tax | Qualified tips deductible up to $25,000 a year, phased out above $150,000 MAGI ($300,000 joint) | No deduction; all tips taxable at 5% |
| Social Security and Medicare | Still owed on tips; employers withhold on reported tips | Not applicable (federal payroll taxes) |
| Where it is claimed | Schedule 1-A (Form 1040) | Nothing to claim |
| Years | 2025 through 2028 | Not adopted (TIR 26-4) |
Who qualifies
The IRS describes qualified tips as voluntary cash or charged tips received from customers, including tips shared through a tip pool. Employees and self-employed workers can both claim the deduction, but only in occupations the IRS lists as customarily and regularly receiving tips.
- The tips must be voluntary: automatic service charges added to the bill do not count
- The occupation must be on the IRS list of tipped occupations
- Self-employed workers in a specified service trade or business cannot claim it, and neither can employees whose employer is one
- For the self-employed, the deduction cannot exceed net income from the tipped business
- You need a valid Social Security number
- If you are married, you must file jointly
- The deduction phases out above $150,000 of modified adjusted gross income ($300,000 joint)
Why Massachusetts still taxes your tips
Massachusetts follows the federal tax code as it stood on 1 January 2024 unless it chooses to adopt later changes. In TIR 26-4, the Department of Revenue said it does not adopt the tips deduction, and its guidance on differences from federal law says plainly that all tips income must be reported in Massachusetts.
That means a server, bartender, hairstylist or delivery driver near Easton or Brockton could see a noticeably lower federal bill for 2025 while the Form 1 is unchanged. If your withholding was set expecting a lower tax overall, check the Massachusetts side too.
Illustrative example. A single server earns $32,000 in wages and $18,000 in qualified tips in 2025, with no other income. Federally, the $18,000 of tips is deductible on Schedule 1-A, on top of the $15,750 standard deduction. Social Security and Medicare are still owed on the full $50,000. In Massachusetts, all $50,000 is income, less the $4,400 personal exemption and any other Massachusetts deductions, taxed at 5%.
Payroll taxes do not change
Employees who receive $20 or more in cash tips in a month must report them to their employer, and the employer uses that report to withhold Social Security, Medicare and income tax on wages and reported tips. The 2025 law did not change any of that. Tips that were never reported to the employer are still subject to the employee's share of Social Security and Medicare tax, figured on the individual return.
Keeping accurate tip records matters more now, not less, because the deduction depends on the amount of qualified tips you can show.
Reporting: 2025 versus 2026
For tax year 2025, the IRS gave transition relief because employers had no separate box for qualified tips. Workers relied on pay stubs, employer statements and their own tip records.
For tax year 2026, the forms change. Qualified tips should appear on Form W-2 in box 12 with code TP, with the tipped occupation code in box 14b. Self-employed and other workers may see them on Form 1099-NEC box 1b, 1099-MISC box 13a or 1099-K box 1c.
- Keep a daily or per-shift tip log
- Save monthly tip reports given to your employer
- Keep pay stubs showing reported tips
- For 2026, check box 12 code TP and box 14b on your W-2
Where we come in
We prepare the federal and Massachusetts returns together, check whether your occupation and tips qualify, and apply the deduction where it belongs and nowhere else. Before we start, we give you a scope and a price in writing.
Figures on this page were checked against the IRS and Massachusetts sources listed alongside on 28 Sep 2026. They change — confirm the current amount before relying on one.
General information for owner-led businesses, not advice for your specific situation. Tax and accounting rules change, and how they apply depends on facts particular to your business. Talk to us — or to another qualified professional — before acting on anything here.
