The federal government just handed freelancers and gig workers a tax break they can use starting with 2025 returns. Under the One Big Beautiful Bill, workers who earn tips can now deduct up to $25,000 of that income from federal taxes for tax years 2025 through 2028.
That covers rideshare drivers, delivery couriers, hair stylists working independently, fitness trainers, and anyone else earning customer-paid tips as part of their self-employment income. A separate deduction applies for overtime pay, targeting workers who log extra hours in any covered role.
The law also changed the qualified business income (QBI) rules. Starting this year, self-employed workers with at least $1,000 in QBI can claim a minimum $400 deduction even if their income falls below the old threshold. For gig workers with fluctuating income, that floor matters.
The IRS broadly defines qualified tips for this deduction. Cash tips, credit card tips, and app-based payments all count as long as they show up in your reported income. Delivery drivers who get tipped through DoorDash or Instacart, Uber drivers with in-app tips, and service workers collecting direct cash payments are all covered.
The deduction applies at the federal level and is taken on Schedule 1 of your 1040. You don’t need to itemize to claim it. State tax treatment varies, so workers in California and New York should confirm whether their state conforms to the new federal provision before projecting total savings.
Keep a record of every tip received, including app payout statements and any handwritten cash log. Tax software updated for 2025 returns should include this deduction in the self-employment section. If you’re working with a preparer, flag the new law explicitly.
For the QBI minimum, you need to be operating as a sole proprietor, single-member LLC, or similar pass-through entity. If you received a 1099-NEC or 1099-K in 2025 with net business income above $1,000, run the numbers before filing.
Workers who already filed 2025 returns without these deductions can file an amended return using Form 1040-X.
Both. W-2 employees who receive tips can also claim the deduction. The income must be reported on your return to qualify. Unreported tips don’t count.
The tip deduction reduces your federal income tax, not self-employment tax directly. Self-employment tax is calculated separately on net earnings from self-employment. But reducing taxable income still cuts your overall tax bill, which is a real dollar-for-dollar savings.