Let’s Talk About Tips and Taxes If you're self-employed and you earn tips, whether it’s from styling hair, painting nails, giving massages, or any other personal service, you already know how confusing tip income can be.

And now, with the new “No Tax on Tips” deduction starting in 2025, it’s more important than ever to understand how to report tips the right way and avoid IRS problems.

This post breaks it down in plain terms, so you know what counts, what doesn’t, and how to stay compliant.

First, Do You Need to Report Tips if You’re Self-Employed?

Yes. Always.

Tips are taxable income, even if they’re paid in cash, through Zelle, handed to you directly, or transferred via Venmo. If someone paid you for your service and added a little extra, it’s income, and it should be reported.

What Counts as a Tip?

According to the IRS, a tip is any voluntary amount given by a customer beyond the base cost of your service.

Tips can come from:

Cash or digital payments (even if not recorded in your main POS)
Apps like Cash App, Venmo, PayPal, Zelle
Tip pooling or tip sharing arrangements
Tips added to credit card charges
Tips given directly to you, not through your business system

If you're self-employed, those tips count as business income, just like the rest of your earnings.

How Do You Report Tips If You’re Self-Employed?

You’ll report tips as part of your gross income on your Schedule C (Form 1040). That includes:

Any tips you received directly
Any tips reported to you by others (like through a shared business)
Even untracked cash tips

💡 Pro Tip: Create a separate income line in your bookkeeping labeled “Tips (reported)” to keep it clean and clear. If you’re audited, the IRS wants to see that you knew it was income and included it.

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What About Form 4137?

Form 4137 is used when an employee doesn’t report all tips to their employer and needs to pay Social Security and Medicare tax on the unreported part.

Most self-employed people do not need Form 4137 because you already pay these taxes through self-employment tax on Schedule SE.

If you're a freelancer or independent contractor (not on payroll), just include your tip income in your total business income on your Schedule C. But if you're working a side job as an employee (W-2) and you underreport tips there, you may need Form 4137.

What’s the Deal with the New Tip Deduction in 2025?

Under the new One Big Beautiful Tax Cut Act, there’s now a deduction for tip income starting in 2025.

Here’s the simple version:

You can deduct up to $25,000 in tips
Tips must be qualified—meaning:
- Voluntary
- Reported to the IRS
- From a job that regularly receives tips
You can claim the deduction even if you don’t itemize
You must file jointly if married and include your SSN on the return
The deduction phases out if you make over $150,000 ($300,000 joint)

Important: Self-employed individuals who work in certain high-earning fields (like law or consulting—known as SSTBs) are not eligible

And remember: the IRS will publish a list of approved tipped occupations by October 2, 2025.

If your job isn’t on the list, you can’t claim the deduction, even if you receive tips.

Example: Let’s Say You’re a Nail Tech

You run your own business and accept payments through Square, Zelle, and tips via Venmo.

In 2025:

You make $32,000 from your services
You earn $7,000 in tips, all reported and tracked

You report:

$39,000 total income on Schedule C
$7,000 of that qualifies as a tip deduction

If your income is under $150K and your job is on the IRS list, you can deduct the $7,000 from your income using the new tip deduction.

Common Mistakes to Avoid

❌ Not tracking tips at all
Use a simple spreadsheet or accounting app to track every tip, even cash.

❌ Mixing tips with personal gifts
Tips are tied to a service. If it’s a birthday gift or personal thank-you, that’s different.

❌ Assuming Venmo = invisible
It’s not. The IRS can see income from payment apps, and 1099-K rules are tightening.

❌ Trying to deduct tips without qualifying
If your job isn’t on the IRS’s official list, or you didn’t report the tips, you won’t be eligible.

What If You Also Have a W-2 Job with Tips?

If you’re working both as an employee and as a self-employed service provider, you’ll need to:

Report tips from your W-2 job to your employer (so it shows up on your W-2)
Report tips from your self-employed work on your Schedule C
Track each income source separately
Coordinate with your tax preparer on whether Form 4137 is required

What to Do Right Now

Start tracking tips — if you haven’t already
Use separate accounts or labels for business payments and tips
Wait for the IRS’s official job list in October 2025
Ask a tax pro if your job qualifies under the new law
File jointly (if married) and include your SSN when claiming the deduction

Final Thought

Tips can feel small, but they matter to the IRS. Whether you’re a hairstylist, massage therapist, or makeup artist, those extra dollars are taxable, and now, they could even lower your tax bill. Just keep it clean. Report them right. And if you qualify for the new deduction in 2025, don’t leave that money on the table.