COLUMBIA, Mo. — Recent changes to the federal tax code have drawn attention for creating a new tax break for workers who earn tips. While often described as “no tax on tips,” the provision is more limited and more complicated than that phrase suggests, says Andrew Zumwalt, director of the University of Missouri’s Personal Financial Planning program.
Beginning with the 2025 tax year, eligible workers may be able to deduct up to $25,000 in qualified tip income on their federal tax return. However, the deduction is not universal, does not apply to all tipped workers and will require extra documentation this year because federal tax forms have not yet been fully updated, Zumwalt says.
First, the deduction applies only to tips earned in traditional tipped occupations. These include jobs such as bartenders, waitstaff, food servers, casino dealers and certain hospitality workers. Tips earned outside these roles generally do not qualify, even if tipping occurs. For example, Zumwalt notes, tips earned while serving food at a casino may qualify, while tips earned at a professional sporting venue may not, depending on the employer’s classification.
There are also important exclusions. Tips earned in certain “specified service trades or businesses,” such as accounting, legal services, health care or athletics, do not qualify for the deduction. In addition, tips must be voluntary, must be reported by the worker, and the worker must have a valid Social Security number. Married taxpayers must file jointly to claim the deduction, and the benefit begins to phase out at $150,000 in income for single filers and $300,000 for married couples filing jointly.
For Missouri taxpayers, it is important to understand that this federal change does not reduce income reported on Missouri state income tax returns, Zumwalt says. The deduction for tips is taken “below the line” on the federal return, meaning it reduces federal taxable income but does not reduce federal adjusted gross income (AGI). Missouri income tax calculations begin with federal AGI, so this deduction does not flow through to Missouri taxable income. As a result, tip income that qualifies for the federal deduction is still fully taxable for Missouri income tax purposes.
For 2025, claiming the federal deduction may be especially tricky. W-2 forms have not yet been modified to clearly separate voluntary tips from other amounts. Workers will generally rely on existing W-2 reporting, including amounts shown in Box 7 for Social Security tips, along with any additional tips reported on Form 4137. Employers may voluntarily include supplemental tip information in Box 14, but this is not required for 2025.
Self-employed workers and gig workers face additional challenges. There is no dedicated line for tips on Forms 1099-NEC, 1099-MISC or 1099-K for 2025. To claim the deduction, these workers must maintain detailed records, such as daily tip logs, point-of-sale reports or third-party settlement statements, that clearly substantiate the amount of qualifying tips received.
Beginning in the 2026 tax year, reporting is expected to become easier, with qualifying tips scheduled to be identified directly on the W-2.
Zumwalt encourages workers who earn tips to review their records carefully and consider seeking guidance before filing. “This change can provide meaningful federal tax relief,” he says, “but it comes with limits and does not affect Missouri income taxes.”
Zumwalt discussed this and other changes to federal income tax law at a recent training for volunteers in the Volunteer Income Tax Assistance (VITA) program, in which IRS-certified volunteers discuss and prepare tax returns for free. For more information, visit the Missouri Taxpayer Education Initiative website at https://muext.us/motax.