No Tax on Tips (2025–2028)

narcolepticnerd September 20, 2025 0 comments

Employer Reporting of Cash Tips

Employers are required by law to report all cash tips that employees report to them. Employees must report all cash tips to their employer, and employers must:

  • Include these reported tips on the employee’s Form W-2
  • Withhold and pay applicable payroll taxes (Social Security and Medicare) on these tips
  • Continue to follow all IRS reporting and recordkeeping requirements for tip income

This requirement remains in effect under the 2025 “No Tax on Tips” law. The new law allows a federal income tax deduction for qualified tips, but does not change employer reporting or payroll tax obligations for tips.

No Tax on Tips (2025 Law)

Overview

The “No Tax on Tips” provision, part of the One Big Beautiful Bill Act of 2025 (Sec. 70201), allows employees and self-employed individuals in certain occupations to deduct up to $25,000 in qualified tips from their federal income tax for tax years 2025–2028.

Deep Research Summary

Legislative Background

  • The “No Tax on Tips” provision is part of the One Big Beautiful Bill Act (H.R. 1, 119th Congress, 2025–2026), signed into law on July 4, 2025.
  • Allows an above-the-line federal income tax deduction for up to $25,000 in qualified tips per year, for tax years 2025–2028.
  • Deduction phases out for individuals with modified adjusted gross income (MAGI) above $150,000 ($300,000 for joint filers).

Who Qualifies

  • Applies to employees and self-employed individuals in occupations customarily and regularly receiving tips, as defined by the IRS (list to be published by October 2025).
  • Tips must be voluntary, not service charges or mandatory fees.
  • Only tips reported on official forms (W-2, 1099, or Form 4137) are eligible.

Key Rules

  • Deduction is available to nonitemizers (can be claimed with the standard deduction).
  • Married Filing Separately filers are not eligible.
  • Deduction does not apply to Social Security and Medicare taxes—these payroll taxes still apply to all reported tips.
  • Employers must report all cash and non-cash tips and the employee’s occupation on Form W-2; nonemployees’ tips and occupation are reported on Form 1099.
  • Payroll systems may need updates to track and report tips separately.

Employer and Employee Responsibilities

  • Employees must continue to report all tips to their employer.
  • Employers must continue to withhold and report payroll taxes (Social Security, Medicare) on all tips.
  • Employers must separately identify total tips and occupation on W-2s and 1099s.
  • Service charges (e.g., automatic gratuities) are not considered tips.

IRS Guidance

  • The IRS is required to publish a list of qualifying occupations and update forms and procedures within 90 days of the law’s passage.
  • Further guidance is expected on reporting, recordkeeping, and compliance.

Legal and Practical Notes

  • The law is temporary (2025–2028) unless extended.
  • The deduction is per person, not per household.
  • The law aims to provide cost-of-living relief for workers in food service, hospitality, and personal care industries.
  • Some occupations (e.g., Specified Service Trades or Businesses under Section 199A) may be excluded.

References

In July 2025, President Trump signed into law a sweeping tax and spending bill that included a headline-grabbing provision: the elimination of federal income tax on tips for millions of service workers. This “No Tax on Tips” rule is set to run from 2025 through 2028 and is designed to provide financial relief to workers in traditionally tipped occupations. However, the law comes with specific rules, eligibility requirements, and limitations. This guide explains everything you need to know about the new law, how it works, who qualifies, and what it means for workers, employers, and the broader economy.

Who Qualifies? (Eligibility)

To benefit from the no-tax-on-tips rule, you must:

  • Work in an occupation that customarily and regularly receives tips, as defined by the Treasury Department (see the official list).
  • Examples of qualifying jobs include: waiters, bartenders, sommeliers, cocktail servers, delivery drivers, DJs, podcasters, influencers, ushers, maids, massage therapists, yoga instructors, movers, parking attendants, bingo workers, club dancers, pastry chefs, cake bakers, wedding planners, personal care aides, tutors, au pairs, skydiving pilots, ski instructors, house cleaners, tow truck drivers, gardeners, electricians, and more.
  • Only tips reported to your employer and shown on your W-2 count toward the deduction.
  • The deduction is not available to married individuals filing separately.
  • The deduction phases out for taxpayers with a modified AGI over $150,000.

Who Does Not Qualify?

  • Workers in non-tipped occupations.
  • Those who do not report tips to their employer.
  • Married individuals filing separately.
  • High earners (over $150,000 modified AGI; deduction is reduced and then eliminated).

How to Claim the Deduction (Step-by-Step)

  1. Track Your Tips: Keep accurate records of all tips received and report them to your employer.
  2. Check Your W-2: At the end of the year, verify that your reported tips are included on your W-2 form.
  3. File Your Taxes: When filing your federal tax return, claim the deduction for up to $25,000 in qualified tips (subject to income limits).
  4. Keep Documentation: Retain records in case of IRS questions or audits.

Economic and Social Impact

Who Benefits?

  • The law is expected to benefit about 4 million workers, or roughly 2.5% of all US jobs as of 2023, according to the Yale Budget Lab.
  • Most beneficiaries are in the restaurant, hospitality, personal care, and gig economy sectors.

Fiscal Impact

  • The Joint Committee on Taxation estimates the provision will add $32–40 billion to the federal deficit over 10 years.
  • Payroll taxes (Social Security and Medicare) and state/local taxes still apply to tips.

Social and Workplace Effects

  • The law may encourage more accurate tip reporting, since only reported tips are eligible for the deduction.
  • Some analysts worry it could incentivize employers to shift more compensation to tips rather than wages.
  • The law may also increase take-home pay for lower- and middle-income workers in tipped jobs, potentially reducing financial stress.

Example Scenarios

Scenario 1: Restaurant Server

Maria works as a server in a busy restaurant. She earns $18,000 in tips in 2025, all of which she reports to her employer. On her tax return, she deducts the full $18,000 from her taxable income, paying no federal income tax on those tips.

Scenario 2: Rideshare Driver

James drives for a rideshare company and receives $7,500 in tips in 2025, all reported to the company and included on his W-2. He deducts the $7,500 from his taxable income.

Scenario 3: High Earner

Samantha is a high-earning bartender who makes $30,000 in tips and has a modified AGI of $160,000. Her deduction is reduced and partially phased out due to her income level. She can only deduct a portion of her tips.

This guide was last updated in September 2025. For the latest information, consult the IRS or a tax professional.

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