Why Net Income Determines Whether You Can Claim It

The new $25,000 Tip Deduction is being celebrated by many workers in the service economy — bartenders, servers, delivery workers, hair stylists, rideshare drivers, and hospitality staff. But there’s an important rule many gig workers haven’t heard:

If you report tips on Schedule C, the deduction is limited to your net business income — not your gross earnings. If you show a net loss or zero profit, the deduction does not apply.

This is a critical difference that self-employed workers need to understand before filing.

Employee vs Self-Employed: Two Very Different Rules

If you are an employee (W-2):

• The tip deduction is tied to the reported tip income on your W-2.

If you are self-employed (1099 / Schedule C):

• The deduction is limited to your net profit from that business.
• If your business profit is zero — your deduction is zero.
• If your business shows a loss — your deduction is zero.

Even if you made $18,000 in reported tips, if you have a net loss on Schedule C, there is nothing to deduct against.

Understanding Net Income for Gig Workers

On Schedule C, net income is:

Gross business receipts
minus
business expenses
minus
depreciation
minus
supplies
minus
vehicle costs
minus
business fees and licenses

You arrive at the number on:
Schedule C, Line 31 — Net Profit or Loss

That line determines the maximum allowable tip deduction.

Example:

• $45,000 in gross gig income
• $38,000 in business expenses
• Net profit: $7,000

Maximum tip deduction allowed: $7,000
Not the full $25,000.

Example: The Rideshare Driver Scenario

A rideshare driver (self-employed):

Gross fares and tips: $30,000
Expenses:

• mileage deduction
• phone
• platform fees
• car cleaning
• maintenance
• tolls
  Total expenses: $29,200
  Net profit: $800

Even if they received $6,500 in tips…
Their max deduction is $800, not $6,500.

Example: The Hair Stylist Scenario

Self-employed stylist renting a chair:

Gross income: $62,000
Tip earnings: $15,000
Expenses:

• chair rental
• supplies
• products
• advertising
  Net business profit: $9,800

Tip deduction allowed: up to $9,800, not $15,000.

If You Have a Net Loss — You Cannot Claim the Tip Deduction

This is the key misunderstanding:

Many gig workers assume the deduction is automatic.

But the IRS will deny the deduction if:

• Schedule C shows a business loss
• Schedule C shows zero profit
• business deductions exceed income

Because there is no taxable income to absorb the deduction.

What Will Trigger an IRS Review or Adjustment?

Expect an IRS hold or correction if:

• you report more tip deduction than net income
• you claim the full $25,000 with low earnings
• your Schedule C has negative or minimal profit
• your business expenses wipe out your income

Potential transcript results:

• TC 570 — Hold
• TC 571 — Adjustment cleared
• TC 290 — Additional tax assessed

This is how refunds shrink unexpectedly.

Advice for Gig Workers: Track Every Dollar

To protect yourself:

• keep mileage logs
• store receipts
• save platform reports
• retain payment records
• document customer tips
• maintain an expense ledger

And when filing, ensure business profitability is correctly reported.

The $25,000 tip deduction is valuable — but only within the boundaries of your net business income.

If you:

• drive rideshare
• deliver food
• cut hair
• provide personal services
• run a solo gig business
• work for yourself in a tip-supported industry

your eligibility is capped by your Schedule C net profit.

No profit = no deduction.
Partial profit = partial deduction.
Profitable business = full deduction up to $25,000.

Understanding this rule prevents refund surprises and helps gig workers file accurately and strategically