If you're paid on a 1099 (a rideshare driver, a booth-renting stylist, a freelance bartender or a delivery driver) you can still deduct qualified tips on Schedule 1-A. The basics are the same as for employees: a qualifying occupation, voluntary tips, a Social Security number, a joint return if married, and the $25,000 cap with the phase-out above $150,000 ($300,000 joint). Two rules are different.
1. The deduction can't be more than your net profit
The tips deduction is limited to the net income from the trade or business where you earned the tips: gross receipts minus the business expenses on your Schedule C. If you earned $9,000 in tips but your business shows only $6,000 of profit after expenses, the deduction is $6,000.
2. Specified service businesses are excluded
Tips earned in a “specified service trade or business” (as defined for the section 199A deduction, such as health, law, accounting, consulting, or the performing arts as a business) don't qualify. That applies to employees of such a business as well.
Example
| Worker | Income (AGI) | Tips | Net profit | Deduction | Federal tax saved |
|---|---|---|---|---|---|
| Delivery driver, single | $38,000 | $7,000 | $24,000 | $7,000 | $840 |
| Rideshare driver, head of household | $52,000 | $5,000 | $41,000 | $5,000 | $600 |
| Booth-renting stylist, single | $46,000 | $12,000 | $9,000 | $9,000 (profit limit) | $1,080 |
Self-employment tax still applies
The deduction lowers income tax only. Self-employed tips are still subject to self-employment tax (about 15.3% on 92.35% of net earnings). On $7,000 of tips, that's roughly $989. The tips calculator shows it when you choose “Self-employed (1099)”.
Records to keep
- App or platform statements showing customer tips separately from fares or fees.
- Forms 1099-K or 1099-NEC, which from 2026 can report qualified tips separately.
- Your mileage and expense records, because they set your net profit.
Drivers, see also no tax on tips for delivery and rideshare drivers.
Common questions
Can 1099 workers claim no tax on tips?
Yes, if their occupation is on the Treasury's list and the tips are voluntary. The deduction can't be more than net profit from that work.
Do self-employed people still pay tax on tips?
Yes. Self-employment tax (Social Security and Medicare) still applies. The deduction only lowers federal income tax.
Sources
- IRS FS-2025-03: Tax deductions for working Americans and seniors
- IRS: Schedule 1-A and instructions
- IRS: Self-employment tax
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