No Tax on Tips

On July 4, President Trump signed into law the One Big Beautiful Bill Act (OBBBA). Included in this bill was the addition of the "No Tax on Tips" deduction.

How It works

Starting in 2025 certain employees that receive qualified tip income will be able to take a deduction against their tip income on their federal tax return (subject to limits).

It is important to point out this deduction doesn't exempt tip income from Social Security and Medicare taxes. Employees won't see an immediate tax break. Those who qualify will have to claim the deduction on their 2025 tax return.

Deduction Limitations

Individuals receiving tips will be able to claim a deduction up to $25,000 on their tax return. This deduction is further reduced for individuals with adjusted gross incomes over $150,000 ($300,000 in case of a joint return). Most employees earning tips will not be affected by this income phase out.

Qualified tips

The law defines "Cash Tips" as those received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.

The term charged is important as that indicates that "Cash Tips" includes tips paid by customers using debit or credit cards not just physical cash.

What occupations qualify

The bill stipulates that the treasury department has 90 days after the signing of the bill to release an official list of occupations the tip deduction applies to. However, we can reasonably assume employees receiving tips received from customers or clients in connection with the following services should qualify for the tip deduction.

• Individuals providing, delivering, or serving food or beverages for consumption.

• Individuals providing barbering and hair care.

• Individuals providing nail care.

• individuals providing esthetics.

• Individuals providing body and spa treatments.

Bottom line:

The "No tax on Tips" deduction is still pretty new, and we’re waiting on further guidance from the IRS, including a finalized list of which occupations qualify. However, based on the current language in the law, it’s safe to assume that many tipped employees will be eligible for this new deduction when filing their 2025 individual tax returns.

We’ll continue to monitor developments and keep you updated as more details are released. In the meantime, if you earn tips, it’s a good idea to keep accurate records and make sure your tips are properly reported on your W-2.

Disclaimer: This post is for informational purposes only and should not be considered tax, legal, or financial advice. Every individual's financial situation is unique, and tax laws are complex and frequently change. Please consult a qualified tax advisor or attorney for guidance tailored to your specific circumstances.