Net income limitation.

Qualified tips from a trade or business can’t be more than the gross income from the trade or business in which the qualified tips were received minus the total of all deductions allocable to that trade or business, including the deductible part of self-employment tax; the deduction for contributions to self-employed SEP, SIMPLE, and qualified plans; and the self-employed health insurance deduction, but not including the deduction for qualified tips. After you determine the other deductions that apply to the trade or business in which you earned qualified tips, reduce the net profit (Schedule C, line 31; the total of Schedule E, line 28(g) through 28(k); or Schedule F, line 34) by the amount of these deductions. Do not reduce it below zero. The net income limitation applies to each separate trade or business in which you received qualified tips. If you have more than one trade or business in which you received qualified tips, you should allocate the deductions in a reasonable manner.

For example, a sole proprietor who only has one business and received qualified tips in the business, reports deductions allocable to the business on Schedule C, as well as the deduction for self-employment tax on Schedule 1, line 15. The net income limitation will be the net profit shown on the Schedule C for the business, less the amount from Schedule 1, line 15. The sole proprietor would include on line 5 of Schedule 1-A the lesser of (i) the qualified tips received in the business, or (ii) the net profit for the business less the amount from Schedule 1, line 15. If the business shows a net loss on Schedule C, then the sole proprietor would not include any qualified tips received in the business on line 5 of Schedule 1-A.

Example 1.

You have a business tutoring for local schools as an independent contractor. You operate your business as a sole proprietorship. During 2025, you received $500 in qualified tips from students that were reported to you by the schools on Forms 1099-NEC and reported separately in earnings statements provided by the schools. Your gross income from the business for 2025 was $5,000 and your deductible expenses from the business are $500. Your net income limitation from your tutoring business is $4,500. On Schedule 1-A, line 5, you enter $500. You can take the full amount of qualified tips from the business into account when figuring your deduction because the net income from that business was more than the amount of qualified tips from the business.

Example 2.

You are a rideshare driver who operates as a sole proprietor. During 2025, you received $1,800 in qualified tips from customers that were reported to you on Form 1099-NEC and reported separately in your earnings statement provided on the rideshare company’s app. Your gross income from the business for 2025 was $15,000 and your deductible expenses from the business were $14,000. Your net income limitation for this business is $1,000. You enter $1,000 of qualified tips on Schedule 1-A, line 5. Do not enter the remaining $800 of qualified tips. This portion of your qualified tips from the business can’t be taken into account in figuring your deduction because it is more than your net income limitation from the business.

Example 3.

The facts are the same as in Example 1 and Example 2 , except that you own and operate both businesses. You enter $1,500 of qualified tips on Schedule 1-A, line 5. This includes $500 from the tutoring business because the net income from that business was more than the amount of qualified tips received in the course of that business. It also includes $1,000 in qualified tips from your rideshare business. It does not include the remaining $800 of qualified tips from your rideshare business because the qualified tips received in the course of the rideshare business are more than the net income from that business by that amount.