Understanding the Impact of No Tax on Tips for Contractors and Tipped Business Owners in 2025

A new federal tax rule starting in 2025 allows many workers to deduct qualified tips from their taxable income. This applies not only to employees, but also to independent contractors and self-employed business owners who receive tips directly from customers.

Qualified tips generally include voluntary cash, card, or app-based tips. Mandatory service charges or required fees do not qualify. The maximum deduction is up to $25,000 per year, subject to income limits.

What makes 2025 unique is that tips will not be separately reported on Forms 1099 or payment platform summaries. Because of this, taxpayers must calculate and document their own tip totals using reasonable records such as tip logs, POS reports, platform statements, receipts, or payout summaries.

For self-employed individuals, tips are still included as income, but the deduction is taken on the personal tax return and is limited to net business income. Tips cannot be used to create or increase a loss.

The IRS is offering temporary transition relief for 2025, allowing reasonable calculation methods while reporting systems are updated for future years. This makes proper documentation especially important.

If you receive tips, now is the time to begin tracking them clearly and consistently. KMR Tax Consultants can help determine eligibility, review records, and ensure the deduction is claimed correctly while preparing you for stricter reporting rules

---

Sources (IRS):

¹ IRS Notice 2025-69, Guidance for Individual Taxpayers Who Received Qualified Tips or Qualified Overtime Compensation in 2025

² Internal Revenue Code §224 (added by the One Big Beautiful Bill Act, Public Law 119-21)

³ IRS Form 1040 Instructions (2025), Deductions for Adjusted Gross Income

⁴ Treasury Regulation §1.6001-1 (Recordkeeping Requirements)