What to Know About the 2025 “No Tax on Tips” Provision

Millions of Americans working for tips pay both federal income tax and payroll taxes on their earnings. But with a recent tax provision, that’s about to change. The new no tax on tips bill gives tipped workers a legal way to keep more of what they earn instead of losing it to the IRS. If you work in restaurants, salons, hotels, or rideshare services, this update matters to your tax preparation.

In this blog, we’ll break down exactly how the no tax on tips bill works, who qualifies, how to claim your deduction, and how to avoid the traps that could cost you your refund.

What the no tax on tips bill Actually Does (and Doesn’t)

If you work in a job where customers tip you (like bartending, waiting tables, or hairdressing), in 2025, a new rule called the No Tax On Tips Bill could let you keep more of those tips. This new tax break was signed into law as part of the “One Big Beautiful Bill Act (OBBB).” It lets certain workers deduct their tip income from federal income taxes. But you still need to meet some conditions and follow the reporting rules.

Let’s start with what this new law does:

• It creates a new federal income tax deduction for tips you earn at work.
• You can deduct up to $25,000 in qualified tip income from your taxable income each year.
• The deduction is available whether or not you itemize deductions.
• It applies to employees and some self-employed workers who get cash or card tips.

And here’s what it doesn’t do:

• It does not erase payroll taxes (FICA). You and your employer still pay Social Security and Medicare taxes on those tips.
• It doesn’t apply to all workers, only to jobs on the official IRS list of “customarily tipped occupations.”
• It doesn’t cover automatic service charges or built-in gratuities.

This new rule is part of the larger tax package known as the no tax on tips and overtime bill, which also includes a similar deduction for overtime pay.

Key Definitions You Need to Know

Qualified Tips: Cash or card tips that are

1. Voluntary (the customer wasn’t forced to pay).
2. Reported to your employer or listed on your tax return.
3. Earned in a job that “customarily receives tips” as of December 31, 2024.

Important facts:

• Maximum Deduction: $25,000 per tax return per year. That means if two spouses both earn tips, they share the $25,000 limit, not $25,000 each.
• Modified Adjusted Gross Income (MAGI) Limit: The deduction begins to phase out once your MAGI hits $150,000 for single filers or $300,000 for joint filers.
• Qualified Occupations: The Treasury’s draft list includes 68 occupations, from servers and bartenders to massage therapists, barbers, hotel staff, and others who regularly receive customer tips.
• SSTB Exception: Workers in a “Specified Service Trade or Business” (SSTB), such as specified service businesses (health, law, performing arts, and athletics), are excluded.

Eligibility Rules for the no tax on tips bill (2025–2028)

The IRS tip deduction rules are clear about who can and can’t use this benefit.

Who Qualifies (Workers and Jobs)

You qualify if:

• You receive cash or charged tips during your regular work.
• You work in a job listed on the IRS list of tipped occupations (to be published by Oct 2, 2025).
• You report those tips to your employer (W-2) or on your own tax return (Form 1099 or 4137).
• Your income is under the phaseout limit.

This includes:

• Waiters and waitresses.
• Bartenders.
• Hotel service staff.
• Nail technicians and hairstylists.
• Rideshare drivers and delivery workers (if tipping is common for their service).

You do not qualify if:

• You work in an SSTB (e.g., a self-employed entertainer).
• You earn over the income phaseout threshold.
• You fail to report your tips.

The IRS estimates that over 10 million workers will report tips in 2026, showing how broad this new deduction could be.

Income Limits and Phaseout Examples

The deduction phases out based on income. Here’s how it works:

The IRS will publish an official worksheet for calculating your phaseout in early 2026.

How to Claim the No Tax on Tips Bill Deduction at Filing Time?

Claiming this deduction isn’t complicated. The IRS tip deduction rules say all qualified tips must be properly reported.

Reporting Tips: W-2, 1099, and Tip Logs

Here’s how to stay compliant:

• W-2 Employees: Your employer should include reported tips in Box 1 of your W-2. You’ll claim the deduction on your Form 1040 when you file.
• Self-Employed Workers (1099): You’ll list the deduction on Schedule C or Schedule 1 and support it with your own records.
• Tip Logs: Keep daily records of cash, card, and pooled tips. Use the IRS Tip Log app or Form 4070A.

Employers are now required to report both the total cash tips and the occupation of the employee on their annual filings.

What Does Not Qualify (Common Pitfalls)

The no tax on tips bill looks simple, but it’s easy to mess up if you don’t know what counts as a “tip.” The IRS calls this out clearly in its proposed guidance. Payments that do not qualify include:

• Automatic service charges, or “auto-gratuities,” are added by restaurants or event venues.
• Mandatory banquet fees, bottle service fees, or resort service charges.
• Cash gifts from coworkers, managers, or family.
• Store credits, tickets, or vouchers are given instead of money.
• Cryptocurrency tips that are not easily convertible to U.S. dollars.

If the customer didn’t freely choose to pay it, or you didn’t report it as income, it doesn’t count as a qualified tip for tax deduction.

The “No Tax on Overtime” Deduction—How It Differs

The no tax on tips and overtime bill covers both types of earnings, but they’re treated differently.

You can use both deductions in the same year if you qualify for both. That’s why many workers refer to it as the “no tax on tips and overtime” clause; both rules came in the same law. However, the IRS says each must be claimed on its own line of your return. Mixing them or double-counting will delay refunds.

How Much Could You Save?

Let’s see how much of your tip income you can save from taxes with some examples below:

Example 1: The Restaurant Server

• Emily earns $30,000 in wages and $18,000 in reported tips.
• She files single with no dependents.
• Her taxable income before deductions is $48,000.

Under the no taxes on tips bill, she can deduct all $18,000. That drops her taxable income to $30,000. At a 12% tax rate, she saves roughly $2,160 on her federal income taxes.

Example 2: The Married Couple

• Luis and Ana file jointly.
• Luis is a bartender who earns $20,000 in tips.
• Ana is a hairstylist who earns $15,000 in tips.
• Together, they earn $70,000 in wages.

Their total tip income is $35,000. But the deduction cap is $25,000 per return, not per person. So they can only deduct $25,000. At a 12% rate, they save about $3,000 in income taxes.

Example 3: The Overtime Worker

• Jordan works 10 hours of overtime each week.
• He earns $60,000 a year, including $8,000 in overtime pay.
• Under the overtime rule, he can deduct the extra half-pay portion (around $4,000). That gives him an estimated tax savings of $480.

Even small deductions like that matter, especially for workers living paycheck to paycheck.

Employer and Platform Responsibilities

Employers play a huge role in making this deduction work. The IRS list of tipped occupations will guide them in deciding which jobs qualify. Here’s what employers must do starting in 2025:

• Update payroll systems to track and report qualified tips.
• List the worker’s occupation when filing W-2 forms.
• Maintain proof of reported tips for each pay period.
• Report withholding correctly, since income tax might be reduced, but FICA still applies.

Digital platforms such as rideshare or delivery apps also must issue accurate 1099 forms listing both total income and reported tips.

Common Mistakes to Avoid

Even though this is one of the easiest new deductions, the IRS warns that small errors could cost you hundreds of dollars. Here are the most frequent mistakes:

1. Not reporting tips at all: Unreported tips aren’t eligible for the deduction.
2. Claiming service charges as tips: Mandatory fees do not qualify.
3. Assuming the deduction removes payroll taxes: It only reduces income tax.
4. Ignoring the $25,000 cap: This limit applies per return, not per person.
5. Working in a disqualified occupation: The IRS will reject deductions for jobs outside the official list.
6. Forgetting income phaseouts: Once your MAGI crosses the line, the deduction shrinks fast.

Keep accurate logs and verify your employer’s forms before filing. The tips tax deduction 2025 section of the IRS site will have updated worksheets to help with math and limits.

Lock In Your Tip Deduction with Bowes & Sullivan

You’re losing money every single payday if you don’t act fast on the no tax on tips bill. Every unclaimed dollar is cash the IRS gets instead of you, and that’s a choice you don’t want to make. Bowes & Sullivan makes sure that doesn’t happen. We help tipped workers, gig earners, and service pros claim every dollar of the no tax on tips bill. We help you calculate qualified tips and file flawless returns that pass IRS checks the first time. Our team tracks every new IRS update, so you don’t have to risk errors or delays. Your paycheck deserves protection.

Contact us today and get your tax advantage before it’s too late.

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