The New No Tax on Tips Deduction: What Workers and Employers Should Know

Congress recently passed the One Big Beautiful Bill Act (OBBBA) introducing a much-publicized new tax break known as the “No Tax on Tips” deduction. Beginning in 2025, qualifying workers will be able to deduct a portion of their tips from taxable income. While the name suggests a sweeping tax exemption, the reality is more limited: the deduction is temporary, restricted, and many tips will still be taxable in important ways.

Below is a comprehensive overview of how the new tip deduction works, who qualifies, and what both workers and employers need to prepare for.

What Qualifies for a Tip Deduction?

To claim the No Tax on Tips deduction, a worker must be employed in an occupation that customarily received tips before 2025. The IRS—not employers—determines which occupations meet this standard.The IRS has released a preliminary list that includes 68 occupations across eight industries. Some examples include:

• Waitstaff and bartenders
• Hotel staff
• Baristas
• Hairstylists and barbers
• Taxi and rideshare drivers
• Casino dealers

Surprisingly, the list also includes some less traditional roles, such as plumbers, electricians, social media influencers, and podcasters—provided they customarily received tips before 2025.

Workers in fields where tipping is not customary—such as healthcare, law, accounting, consulting, financial services, athletics, and performing arts—do not qualify.

What Counts as a Tip?

For purposes of the tip deduction, the IRS defines a tip as:

• A voluntary payment determined solely by the customer
• Paid in cash, credit card, or other direct payment
• Not the result of negotiation
• Not a service charge

Mandatory fees, automatic gratuities, and any negotiated compensation don’t qualify as tips and cannot be deducted.

How Much Can You Deduct?

From 2025 through 2028, eligible workers can deduct up to $25,000 per year in qualified tip income. Key rules include:

• The deduction applies to both employees and independent contractors.
• Self-employed workers cannot deduct more than their net business income.
• The deduction begins to phase out at modified adjusted gross incomes above $150,000 (or $300,000 for joint filers).

How Much is the Deduction Worth?
The actual tax savings depend on your tax bracket. For example:

• A worker in the 22% bracket who earns $25,000 in qualifying tips would save $5,500 in federal income taxes.

However, for workers who owe little or no income tax, the deduction may provide little or no benefit.

Important: This deduction does not reduce Social Security or Medicare taxes. All tips remain subject to those payroll taxes.

Reporting Requirements for Workers

You can claim the deduction only on tips reported to the IRS.

• Employees must continue reporting cash tips to their employer.
• Accurate recordkeeping becomes even more important, since only documented tips qualify for the tax benefit.

Reporting Requirements for Employers and Platforms
Beginning in 2026, employers, third-party payors (such as PayPal), and digital platforms like Uber must:

• Separately report the worker’s occupation
• Report cash tips eligible for the deduction

This information will appear on:

• Form W-2 for employees
• Form 1099-NEC or Form 1099-K for non-employees

For the rest of 2025, employers should continue withholding income and payroll taxes as usual. Updated withholding tables reflecting the new deduction are expected in 2026.

Next Steps

The new No Tax on Tips deduction offers meaningful tax relief for workers in industries where tipping is standard practice—but the rules are specific, and the benefits vary widely depending on income level, occupation, and the type of tip received.

If you have questions about whether your occupation qualifies, how to track your tips, or how this deduction may affect your tax planning or small business, contact TrueBlaze Accounting & Tax.