“No Tax on Tips” in 2025–2028: What Tipped Workers Need to Know

Tipped workers just got a major break on their federal income taxes, but there are important rules to follow.

 

Thanks to the One Big Beautiful Bill Act (OBBB), eligible workers can deduct up to $25,000 of qualified tip income from their federal taxable income starting with the 2025 tax year (returns filed in 2026). This temporary deduction is available through 2028, unless Congress extends it.

 

But this isn’t a tax-free pass. It's a deduction, not an exemption, and it only applies to certain tips under specific conditions.

 

Who Qualifies for the Deduction?

 

To claim the “No Tax on Tips” deduction, you must:

  • Work in a job the IRS identifies as “customarily and regularly tipped” as of December 31, 2024 (examples include servers, bartenders, valets, and salon workers).
  • Report your tips properly to your employer (if applicable) and on your tax return.
  • Stay under the income cap. The deduction phases out for those with modified adjusted gross income (MAGI) over $150,000 (single filers) or $300,000 (joint filers).

Self-employed workers can also claim the deduction, but only up to the amount of net income from the business where the tips were earned.

 

What Counts as “Qualified Tips”?

 

The IRS defines qualified tips as:

  • Voluntary cash or credit card tips left directly by customers
  • Tips shared among staff (such as pooled or split tips)

What doesn’t count:

  • Mandatory service charges (like automatic 18% gratuities)
  • Non-cash tips (such as tickets, gift cards, or event passes)

While qualified tip income may reduce your federal taxable income, it’s still subject to FICA taxes. That means Social Security, Medicare, and possibly state or local income taxes still apply.

 

What Workers Should Do Now

 

To protect your eligibility and avoid IRS issues, start building these habits now:

  • Track your tips daily . Keep a personal log in case of audit questions or discrepancies.
  • Report tips monthly to your employer using IRS Form 4070, per existing IRS rules.
  • File honestly and on time . This deduction only applies if your tips are properly reported.

Accurate tip tracking now could save you thousands in taxable income and reduce the risk of audit down the road.

 

What Employers Need to Know

 

Although this is an employee-level deduction, employers still play a vital role. You must:

  • Continue reporting employee tip income on W-2s
  • Handle FICA and payroll tax responsibilities as usual
  • Ensure proper recordkeeping and reporting processes are in place

The IRS has announced pe nalty relief for certain information-reporting errors in the 2025 tax year, as part of a transitional period. However, this relief is currently limited to 2025, so it’s crucial to get systems in order early.

 

Need help understanding how the new tip deduction affects your tax situation or your business? Whether you’re a tipped worker, a small business owner, or self-employed, our firm can guide you through the new requirements and help ensure full compliance.

 

Schedule a confidential consultation today and stay ahead of the tax changes.