What Counts as a Qualified Tip? The IRS Definition Explained

Last reviewed November 14, 2026 · Figures checked against official sources · How we verify

In one paragraph: A qualified tip is a voluntary payment, in cash or an electronic equivalent, that a customer decides on and pays to a worker in an IRS-listed occupation (or that is shared through a tip pool), and that is reported on a W-2, 1099 or Form 4137. Mandatory service charges don't count, and the deduction is capped at $25,000.

The four tests

Listed occupation. The tip must be received in an occupation that customarily and regularly received tips on or before December 31, 2024. The final regulations list 71, in eight categories (see the full list).
Voluntary and not negotiated. The customer pays it voluntarily and it isn't subject to negotiation; the customer determines the amount.
Medium of payment. Cash or an equivalent: cash, check, credit or debit card, gift card, tokens readily exchangeable for a fixed amount of cash, or a mobile payment or other electronic settlement denominated in cash.
Reported. It must appear on Form W-2, Form 1099-NEC, Form 1099-MISC or Form 1099-K, or be reported on Form 4137.

Service charges versus tips

The IRS's example: a restaurant adds an automatic 18% service charge for large parties and distributes it to waiters, bussers and kitchen staff. If the customer cannot disregard or modify the charge, amounts distributed to workers aren't qualified tips. If the customer does have the option to disregard or modify it, the charge may be treated differently, so check your pay statement to see how your employer classified the money.

Employees, gig workers and the self-employed

Employees: qualified tips appear in W-2 box 7 and, on 2026 forms, as the cash tips reported in box 12 code TP with the Treasury Tipped Occupation Code in box 14b.
Self-employed and gig workers: qualified tips are included in 1099-NEC, 1099-MISC or 1099-K amounts. The deduction can't exceed the net income of the business in which the tips were earned. The IRS says gig workers and other self-employed individuals can qualify if their occupation is on the list and other requirements are met.
Both: If you receive tips as an employee and as a self-employed worker, Schedule 1-A has separate lines and you should read the instructions.

The specified service trade or business (SSTB) limit

The law denies the deduction for tips received in a "specified service trade or business" as defined in section 199A(d)(2), and treats an employee as being in an SSTB if the employer's business is one. The April 2026 final regulations didn't finalize detailed SSTB rules (they reserved that paragraph). Under IRS Notice 2025-69, until January 1 of the first calendar year after final SSTB regulations are issued, the IRS treats taxpayers (employees and self-employed) as not being in an SSTB if they work in an occupation on the tipped-occupations list. Watch for IRS updates.

What disqualifies a tip

The occupation is not on the list.
It's a mandatory service charge.
It's paid for services that are a felony or misdemeanor under applicable law, for prostitution, or for pornographic activity (IRS Publication 6133).
It's unreported and not on a W-2, 1099 or Form 4137.

Tips remain taxable for payroll purposes

The IRS's W-2 instructions say tips are generally subject to federal income tax withholding and both the employer and employee share of Social Security and Medicare tax if you receive $20 or more in a month. The deduction lowers income tax only.

Frequently asked questions

Is a mandatory 18% gratuity a qualified tip?

Not if the customer has no option to disregard or change it. The IRS gives the example of an automatic 18% service charge for large parties that is distributed to workers: with no option for the customer to disregard or modify it, the distributed amounts are not qualified tips.

Do tips paid through Venmo, Cash App or a card count?

Yes. Qualified tips can be paid in cash or an equivalent such as check, credit card, debit card, gift card, readily exchangeable tokens, or another form of electronic settlement or mobile payment app denominated in cash.

Do tip pools count?

Yes. Qualified tips can be received from customers or, for an employee, through a mandatory or voluntary tip-sharing arrangement such as a tip pool.

Do I need a Social Security number?

Yes, and if you are married you must file jointly. The deduction also requires the tips to be reported on a W-2, 1099 or Form 4137.

Can I deduct tips that were never reported?

No. The IRS says workers can take the deduction only for qualified tips included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported by the worker on Form 4137.

Sources and citations

Every dollar figure on this page was checked against the official pages below on November 14, 2026. If an agency updates its guidance, the agency page controls.