Understand no tax on tips deductions
About the no tax on tips deductions
Eligible workers may be able to deduct up to $25,000 in qualified tips on their federal income tax return. The deduction can apply to both employees and self-employed people. It doesn't mean all tips are tax-free, or that Square determines whether you qualify.
Generally, qualified tips are voluntary payments from customers received in an occupation that customarily and regularly receives tips. Mandatory service charges, such as an automatic gratuity that a customer cannot change, aren't qualified tips. Other requirements and limits also apply. For example, self-employed people cannot deduct more than their net income from the business where they earned the tips.
Before you begin
Keep records of the tips you receive.
The IRS identifies Forms W-2, 1099-NEC, 1099-MISC, 1099-K, and 4137 as ways qualified tips may be reported. Receiving a form does not, by itself, mean the full amount shown is deductible. See the IRS explanation of qualified tips and reporting forms.
Consult a tax professional for advice about your eligibility and how to claim a deduction on your return. For federal requirements, see the IRS guidance on the No Tax on Tips deduction.
Find your tip information
Qualified tips may be reflected on different tax forms, depending on how you work and how the tips were reported:
Form W-2: If you are an employee, review the tips reported by your employer. If your employer uses Square Payroll, you can review your pay stubs and Form W-2 in your Square Payroll employee dashboard. Employers can review draft Forms W-2 in Square Dashboard under Payroll > Tax Forms.
Form 1099-NEC or Form 1099-MISC: Some non-employee tip income may be reported on these forms. Don't assume that every Form 1099-NEC or Form 1099-MISC includes tips. Square Payroll does not pay or report contractor tips on the Forms 1099-NEC it generates, this is the responsibility of the contractor.
Form 1099-K: If you receive payments through Square, you may receive a Form 1099-K. It reports payment transactions; it does not, by itself, determine which amounts are qualified tips or whether you qualify for the deduction. Review your Square payment records and manage your Form 1099-K alongside your own tip records.
Form 4137: In some circumstances, an employee reports tips to the IRS using Form 4137. Ask a tax professional whether this form applies to your situation.
Review your records
Gather your tax forms and records of tips received during the tax year. If you worked for more than one employer or used more than one payment provider, include records from each source.
Compare the forms with your pay stubs, payroll reports, Square payment records, and your own tip records, as applicable. Do not treat the total payment amount on Form 1099-K as your tip total.
If information on a Square-issued form appears incorrect, review the guidance for that form or contact Square Support about the reporting information. For questions about your deduction or tax return, consult a tax professional.