Qualified Tips Deduction 2026: Schedule 1-A Part II, Line by Line

§1One deduction, one schedule, three walls

This article is for you if you earn tips in your own trade or business — you file a Schedule C, and part of what lands on its line 1 is tip money — and you have heard that tips are now deductible. They are, on one schedule, under three successive limits, and the deduction is narrower than the slogan that travels with it. The claim is made on Schedule 1-A (Form 1040), Part II, the part headed "No Tax on Tips," and the trade-or-business share of it is this article's whole subject: the tips a self-employed person received in the course of a business, entered on the business line of that part.

Two boundaries stand at the door, and both are printed in the documents this article reads. The first: the deduction is an income-tax deduction only. The final regulations say it in so many words — the deduction does not apply for self-employment-tax purposes and is not taken into account in figuring net earnings subject to that tax. Every tip dollar stays in Schedule SE exactly as before; Step 5 below returns to this, because it is the contrast the worked example is built to show. The second: the deduction is temporary. As legislated, it is available for tax years beginning after December 31, 2024, and before January 1, 2029 — tax years 2025 through 2028. This article prints the window and speculates about nothing beyond it.

The reader's live question is usually an ordering question: she has heard of the $25,000 cap and assumes it is the number that will cut her deduction. For a self-employed filer it usually is not. Part II applies its limits in the order the filer meets them — first the net income limitation, which caps business tips at what the business actually kept; then the $25,000 cap; then the modified adjusted gross income phaseout. The worked example in Step 4 is a filer whose tips exceed the famous cap — and whose deduction is cut by the first wall before the cap is ever reached.

§2Step 1: the form as it stands — a final 2025 spine and a restructured 2026 draft

Schedule 1-A is new enough that its two posted editions do not match, and this article reads both, labeled as what they are.

The 2025 final. Part II's caution, printed at the head of the part, sets three conditions before any line is reached: the tips must come from an occupation listed at IRS.gov/TippedOccupations; the tip earner must have a valid Social Security number; and a married filer must file jointly. Employee tips run at lines 4a–4c. Line 5 is the business line: qualified tips received in the course of a trade or business — the amount included in Form 1099-NEC box 1, Form 1099-MISC box 3, or Form 1099-K box 1a — and the line prints its own ceiling in its own text: do not enter more than the net profit from the trade or business. Line 6 adds the employee and business streams. Line 7 takes the smaller of line 6 or $25,000. Lines 8–13 run the phaseout, and line 13 is the qualified tips deduction. The part's total travels with the schedule's other parts to line 38, which the 2025 form sends to Form 1040, line 13b.

The 2026 draft. The 2026 Schedule 1-A is still a draft — its coversheet reads "DRAFT—NOT FOR FILING" — and Part II is rebuilt. Employee tips move into a per-employer table at line 4, with the employee total at line 5. Business tips move into a per-business table at line 6: one column takes the business's net profit, another takes its other allocable deductions, a third subtracts the second from the first, the payer columns take the tip amounts from up to three information returns, and the last column enters the smaller of the net figure or the tips total. Line 7 carries the business total forward; line 8 adds the two streams; line 9 takes the smaller of line 8 or $25,000; lines 10–15 repeat the phaseout; and line 15 is the qualified tips deduction. So the route a 2026 filer walks — line-6 table, line 7, line 9, line 15 — is not the 2025 route of line 5, line 7, line 13. Every 2026 line number in this article is cited as an IRS draft line number, and the final 2026 Schedule 1-A, when it posts, is this page's first correction trigger: the structure and the numbers will be re-read against it before anything here is restated as final.

What does not change between the two editions is the machinery underneath — the limitation, the cap, and the phaseout are the statute's, stated in the instructions and the notice this article reads next. The draft rearranges where the filer writes; it does not rearrange what cuts the deduction.

§3Step 2: wall one — the net income limitation

The first wall is a definition, and it lives in the instructions, not on the form. The Instructions for Form 1040 (2025), in the Schedule 1-A instructions' passage headed "Net income limitation," print it: qualified tips from a trade or business cannot exceed the gross income from that business minus the total of all deductions allocable to it — expressly including the deductible part of self-employment tax, the deduction for contributions to a self-employed SEP, SIMPLE, or qualified plan, and the self-employed health insurance deduction, and expressly not including the deduction for qualified tips itself. In the form's own working terms: take the business's net profit — Schedule C, line 31 — and reduce it by those other allocable deductions. Do not reduce it below zero.

Three properties of the wall matter, and all three are printed. It applies per trade or business: a filer with two businesses figures the limitation for each one separately, and the instructions supply a Multiple Trades or Businesses Worksheet that runs exactly that computation — net profit, minus the other allocable deductions, then the lesser of that figure or that business's tips. A business that shows a net loss contributes nothing: the sole proprietor includes no qualified tips from that business on the line at all. And the instructions' own miniature examples show the wall working at small scale — a tutoring business whose limitation is $4,500 enters its $500 of tips in full; a rideshare business limited to $1,000 enters only $1,000 of its $1,800 of tips.

One sourcing note rides with this step, because this definition has a history. The IRS's own page of changes to the 2025 Instructions for Form 1040 records that the Net income limitation discussion was updated in February 2026 to add what it says about allocable deductions — anyone working from a copy of the instructions downloaded before February 27, 2026 is working from the thinner version, and secondary summaries of the original printing understate the subtraction set. This article cites the revised instructions, and the worked example below is figured with the full set — which is precisely why its result lands where it does.

Notice 2025-69 states the same test at the statute's level: business tips count only to the extent the business's gross income, tips included, exceeds the sum of the deductions allocable to that business. The notice also carries the transition-year substantiation rule for nonemployees — for 2025, tips did not have to be separately stated on the information return; amounts inside the return's totals, backed by the filer's own documentation such as earnings statements, receipts, point-of-sale reports, and daily tip logs, were enough. Step 6 below prints where 2026 states the tips instead.

§4Step 3: walls two and three — the $25,000 cap and the income phaseout

Past the limitation, the form applies the two limits a reader is likelier to have heard of.

The cap. Line 7 of the 2025 form — line 9 of the 2026 draft — takes the smaller of the combined tips total or $25,000. The cap is a single figure for the part, not per business and not per stream: employee tips and business tips are added before it applies. It is the second wall, and it can only cut what the first wall left standing — a filer whose limitation already brought her below $25,000 never feels it, as the example shows.

The phaseout. Lines 8–13 of the 2025 form — lines 10–15 of the 2026 draft — reduce the deduction as modified adjusted gross income rises past $150,000, or $300,000 on a joint return. The mechanics are printed arithmetic: the excess over the threshold is divided by $1,000 and decreased to the next lower whole number, multiplied by $100, and that product is subtracted — so the deduction steps down in $100 increments and reaches zero $250,000 past the threshold. Filers under the threshold skip the whole computation; the example's filer is one of them.

And behind all three walls stand the part's entry conditions from Step 1 — a listed occupation, a valid Social Security number, joint filing if married — which are not limits on the amount but gates on the part itself. A filer who fails a gate does not reach the walls.

§5Step 4: worked example — one massage therapist, $34,000 of tips

One worked example, with numbers used only in this article. Our filer is a self-employed massage therapist — an occupation the IRS's Tipped Occupations page lists, in its group headed "Personal appearance and wellness," as Treasury Tipped Occupation Code 602, Massage therapists. She has one Schedule C business and no other income. Her tips for 2026 arrive separately stated on her information returns, under the boxes Step 6 prints. One fence stands over the whole example, stated here and read in full in Step 6 below: massage therapy sits in the field of health, which the statute names a specified service trade or business — and tips received in such a business are outside this deduction unless the transition rule in Notice 2025-69 shelters them. Her example runs only under that shelter, and the article says so wherever the example runs. These are hypothetical figures, not a prediction and not your numbers.

The business. Gross receipts $88,000, of which qualified tips $34,000; expenses $52,000. Schedule C, line 31 net profit: $36,000.

The self-employment run — on the full profit, tips included. $36,000 × 92.35 percent = $33,246.00; × 15.3 percent = self-employment tax $5,086.64; the deductible half, to Schedule 1, line 15, is $2,543.32. No part of the tips deduction touches this run — Step 5 prints why.

The allocable deductions beyond Schedule C. The deductible half of self-employment tax, $2,543.32; a SEP contribution of $4,800 — inside the verified ceiling for her profit, 20 percent of the $33,456.68 that remains after the half deduction, or $6,691.34; and self-employed health insurance of $6,200. Total: $13,543.32.

Wall one. The net income limitation: $36,000 − $13,543.32 = $22,456.68. On the 2025 spine, line 5 takes the lesser of her tips, $34,000, or the limitation: $22,456.68. On the 2026 draft spine, the same figure is the line-6 table's net column and its "smaller of" column, carried to line 7.

Wall two. Line 6 of the 2025 form is $22,456.68 — she has no employee tips — and line 7 takes the smaller of that or $25,000: $22,456.68. The cap never engages. On the draft spine, line 9 does the same work with the same result.

Wall three. Her modified adjusted gross income stands at about the size of her profit — far under the $150,000 threshold — so the phaseout subtracts nothing.

The landing. The qualified tips deduction is $22,456.68 — line 13 of the 2025 form; line 15 of the 2026 draft, cited as an IRS draft line.

The example's teaching point is the ordering. Her tips, $34,000, exceed the $25,000 cap on paper — and the cap is the one limit that never touches her, because the limitation, figured with the full allocable set the revised instructions print, cut the amount to $22,456.68 first. A filer who skips the subtractions — who reads only the form's one-line ceiling, "net profit" — would enter $25,000 at the cap and overstate the deduction by $2,543.32, which is, not coincidentally, exactly the half of self-employment tax she forgot to subtract.

§6Step 5: the contrast — the deduction never touches Schedule SE

It is worth pausing on what did not happen in Step 4. The example's self-employment tax, $5,086.64, was figured on the full $36,000 of profit — every tip dollar inside it — and the deduction changed that figure by nothing. That is not an oversight in the example; it is the regulation's own statement. The final regulations, T.D. 10044, print in their preamble, in substance: the qualified-tips deduction does not apply for FICA or SECA purposes and is not taken into account in determining net earnings subject to SECA tax. The deduction lives entirely on the income-tax side of the return — it reduces the income the income tax reads, on Schedule 1-A, and stops there.

So the phrase that names the schedule's part — "no tax on tips" — is never printed unqualified on this page. For a self-employed tip earner there is a deduction against income tax, capped and limited as Steps 2 and 3 read it, and there is self-employment tax on the tips in full, exactly as there was before the schedule existed. Both sentences are the article; neither stands alone.

§7Step 6: the occupation list — and the transition rule that shelters the example

The part's first gate is a list. The IRS's Tipped Occupations page prints the Treasury Tipped Occupation Codes — codes, titles, descriptions, examples, and occupation codes, across eight groups and 71 occupations — and frames the list as the one used to figure the deduction on Schedule 1-A. This article names occupations only as that page prints them. The example's filer stands on its row 602 — Massage therapists, in the group the page heads "Personal appearance and wellness." One of this site's own trades stands on the page as well — row 603 — Barbers, hairdressers, hairstylists, and cosmetologists — which is why the stylist articles in this catalogue (Article 17 and Article 22) already point at this schedule and stop: the deduction was always going to be read here, on its own form, and not on Schedule C.

The list, though, is only the first half of the example's footing. Section 224 carries a second condition: the tips must be received in a trade or business that is not a specified service trade or business — an SSTB, in the vocabulary the statute borrows from section 199A — and section 199A's list of specified fields includes health. A massage practice is a health-field business on the statute's own terms. What keeps the example's filer inside the deduction today is a transition rule, and it is printed in Notice 2025-69: until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for purposes of section 224, the IRS will treat a tip earner in a listed occupation as having received the tips in a business that is not an SSTB. The notice extends the same relief expressly to nonemployees — to the self-employed side this article reads.

Two disciplines ride with that paragraph, and the article keeps both in print. First, the trigger is quoted exactly as the notice prints it — a regulation about the SSTB determination — and no end date for the shelter is asserted anywhere on this page, because none can be computed from the texts read. Final regulations T.D. 10044 exist, and Step 5 quotes them; but their scope is the occupation list and the definition of qualified tips, and a search of that document finds no SSTB-determination rule. Whether T.D. 10044 is the issuance that starts the notice's clock is not established from the primary texts, and this article does not resolve it by assertion. Second, the SSTB-determination final regulations, when they issue, are a correction trigger for this page: the shelter paragraph and the example's framing will be re-read and corrected with a dated note. A reader whose occupation sits in a specified field should read this step as the article's most perishable paragraph.

§8Step 7: the 2026 boxes — where the tips will be stated

For 2025, Notice 2025-69 let a nonemployee's tips ride inside the information return's totals, substantiated by her own records. For 2026, the reporting separates them. Publication 505 (2026), in its What's New, prints the boxes in which qualified tips are reported to the earner: Form W-2, box 12, code TP; Form 1099-MISC, box 13a; Form 1099-NEC, box 1b; Form 1099-K, box 1c — with the earner's occupation code carried at W-2 box 14b, 1099-MISC box 13b, 1099-NEC box 1c, and 1099-K box 1d. Those are the boxes the 2026 draft Schedule 1-A's line-6 table points at when it asks for the tip amounts from up to three information returns — the business line no longer asks what the filer's records say the tips were, without also asking which printed box they came from. The example's filer has her $34,000 in those boxes; a 2026 filer whose payers have not separated the tips is in the notice's substantiation world for another year, and this article prints the boxes as the form system now states them, not as a promise about any payer's software.

The window closes the article. The deduction this page reads is legislated for tax years beginning after December 31, 2024, and before January 1, 2029. It is read here in its second year, on a draft form, under a transition rule whose clock has not visibly started. Every one of those three conditions is dated in the update log below, and each carries its own trigger for correction.

Another form-led standalone in this catalogue, on the same discipline of reading the form as issued: the statutory employee, whose W-2 files Schedule C. Article 29