No Tax on Tips-Really?

October 18th, 2025 at 6:47 AM

Congress recently passed the One Big Beautiful Bill Act, or OBBBA, which introduces a new tax deduction for tips beginning in 2025. This provision, called “No Tax on Tips,” sounds broader than it really is. The deduction is both temporary and limited in scope, and many tips will still be subject to taxation.

Who Qualifies for the Deduction?

Only workers in occupations where tips are customarily received can claim this deduction. Examples include waitstaff, bartenders, hotel staff, hairstylists, barbers, taxi and rideshare drivers, baristas, and casino dealers.

The IRS has published a comprehensive list of qualifying occupations.

Workers in fields such as healthcare, law, accounting, consulting, financial services, the performing arts, and athletics are not eligible to claim the deduction.

What Counts as a Tip?

The IRS defines tips as voluntary cash payments or those made by charging a credit card. The tipper—not the worker—must determine the amount. Negotiated payments and service charges do not qualify as tips.

How Much Is the Deduction?

• The deduction applies from 2025 through 2028.
• Workers can deduct up to $25,000 per year in tips.
• Self-employed workers cannot deduct more than their net business income.
• The deduction phases out for taxpayers with modified adjusted gross income above $150,000 (or $300,000 for joint filers).

The value of the deduction depends on your tax bracket. For example, a taxpayer in the 22 percent bracket who earns at least $25,000 in tips saves $5,500 in income tax. But if you owe little or no income tax, the deduction provides little or no benefit.

This deduction does not reduce Social Security or Medicare taxes.

What Must Tipped Workers Do?

The tip deduction can be claimed only for tips reported to the IRS. Employees who receive cash should report to their employer the total amount of tips they receive.

What Must Employers Do?

Beginning in 2026, employers, third-party payors (such as PayPal), and platforms like Uber must separately report the worker’s occupation and any cash tips eligible for the deduction.

Employers will report this information on Form W-2 for employees.

Non-employees will receive Form 1099-NEC or Form 1099-K.

For the rest of 2025, employers should continue withholding income and payroll taxes from all wages. Starting in 2026, the IRS will update its withholding tables to reflect the new tax deduction for tips.

Mark S. Fineberg, CPA