How the New Tip Deduction Works for Self‑Employed

Starting in 2025, self‑employed individuals—like independent contractors or gig workers—can also claim the new tip deduction.

But there is an important rule:

You can’t deduct more in tips than your business actually earned.

Here’s how it works:

• Deduction limit: Your qualified tip deduction is capped at your net income (after expenses) from the business where you earned the tips.

• Maximum deduction: The same $25,000 annual limit applies, but you can’t claim more than your net profit.

• Example: If your business earns $12,000 in net profit for the year, and you received $15,000 in tips, your deduction is limited to $12,000.

Why tracking matters:

• Keep clear records of all cash and card tips.

• Track your income and expenses so you know your true net profit.

• If you have multiple side hustles, track tips separately for each activity.

Take Action:

Start tracking your tips and business finances now. If you are not sure what your net profit is or how to organize your numbers, I can help you get clear so you don’t miss out on this new deduction.

Each week, I share a clear, bite-sized tax insight straight from my continuing education so you can stay informed without sifting through tax changes.

Next week we share how this tip deduction phases out at higher income levels.

Thanks for reading,

Brandy Sparkman, EA

I’ll keep learning so you can stay focused on what you do best.

See you next week for another Tax Minute