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For millions of Americans in the service industry, tips make up a significant portion of their income.
On July 4, 2025, the landmark “No Tax on Tips” provision—part of the broader “One Big Beautiful Bill” was signed into law.
This new measure allows eligible workers to deduct up to $25,000 of cash tip income from their federal taxes each year through 2028.
1. What Is the No Tax on Tips Act?
The law allows qualifying workers to deduct up to $25,000 in cash tips from their federal taxable income each year, starting with the 2025 tax year.
It’s designed to provide relief to service workers in industries like hospitality, food service, and personal care, where tips make up a significant portion of wages.
Why it matters: For a server earning $20,000 in tips annually, this could mean a tax savings of over $2,000.
2. Who Qualifies for This Deduction?
- Tipped Employees: Servers, bartenders, delivery drivers, hairstylists, nail technicians, and others who receive cash tips.
- Income Limits: The deduction phases out for individuals earning over $150,000 and joint filers earning more than $300,000.
- Cash Tips Only: Credit card tips and service charges are not included.
3. How Much Could You Save?
Here’s a look at examples of potential tax savings for tipped workers:
| Annual Cash Tips | Potential Tax Savings |
|---|---|
| $10,000 | ~$1,050 |
| $20,000 | ~$2,100 |
| $25,000 | ~$2,625 (maximum benefit) |
Note: Savings vary depending on your tax bracket.
4. What Businesses Need to Know
- Employer Reporting: Businesses must accurately report employee tips on W-2s and 1099s under updated IRS guidance.
- Payroll Tax Impact: This law does not change Social Security or Medicare payroll tax obligations on tips.
- Employer Credit: Expanded payroll tax credits may be available for reporting employee tips properly.
5. What Workers Should Do Now
- Track your tips daily using IRS Form 4070A or a digital log.
- Review your W-2 or 1099 in January to confirm tips are reported accurately.
- Plan to claim the deduction on your 2025 tax return (filed in early 2026).
Frequently Asked Questions (FAQ)
When does the No Tax on Tips law take effect?
The new law applies to income earned in tax year 2025. Workers can claim the deduction when they file their 2025 federal tax return in early 2026.
Does this mean tips are completely tax-free?
No. The law allows qualifying workers to deduct up to $25,000 in cash tips from their federal taxable income each year. Other taxes, like Social Security and Medicare payroll taxes, still apply.
Do I still need to report my tips to the IRS?
Yes. Accurate tip reporting is still required to qualify for the deduction. Use IRS Form 4070A or a digital log to track daily tips and report them to your employer each month.
What about credit card tips or service charges?
Only cash tips qualify for the deduction. Tips paid by credit card or included as service charges on bills are not eligible.
Does this law change state income taxes on tips?
No. This is a federal law. Some states may still tax tips as income, so check your state’s tax rules or consult a tax professional.
How does this impact small business owners?
Employers must continue reporting employee tips on W-2 forms and ensure their payroll systems comply with IRS updates. They are not exempt from paying their share of Social Security and Medicare taxes on tips.
What happens if I earn more than $25,000 in cash tips?
The deduction applies to the first $25,000 of cash tips. Any additional tip income over that amount remains taxable as ordinary income.
How can I make sure I qualify for the deduction?
Keep detailed records of your cash tips, report them monthly to your employer, and work with a tax professional to ensure compliance when filing your return.
Helpful Resources
- No Tax on Tips Act (S.129)
- IRS Pub. 531: Reporting Tip Income
- RSM US: Tips & Overtime – Employer Guide
- Tax Foundation – Tax Policy Updates
Amro Badran, EA is the Managing Partner of BadranTax LLC,
Experienced and Trusted Tax Resolution Firm based in New Brunswick, NJ.
With over 40 years of experience and accreditation as a Federal Enrolled Agent, Amro Badran and his team of experts specialize in helping individuals and businesses resolve complex IRS issues and controversies.
