As of July 4, 2025, a significant change to the U.S. tax code is in place: the federal government has passed a provision eliminating income tax on tips—up to $25,000—for eligible workers. Tucked into the sweeping One Big Beautiful Bill Act, the “No Tax on Tips” policy has drawn praise, criticism, and a great deal of curiosity from workers, employers, and tax professionals alike.
What the Law Does
For tax years 2025 through 2028, workers in traditionally tipped occupations—such as servers, bartenders, hairstylists, valets, delivery drivers, and others—can deduct up to $25,000 in qualified tip income from their federal income taxes. This deduction is “above the line”, which means workers do not need to itemize to benefit from it.
However, the deduction does not apply to payroll taxes—tips will still be subject to Social Security and Medicare taxes, as well as state and local income taxes, depending on jurisdiction.
There is also a phase-out for high earners: individuals earning over $150,000 and married couples earning over $300,000 may see their benefit reduced or eliminated altogether.
Who Qualifies?
The IRS will publish a list of qualifying occupations by October 2, 2025, along with additional guidance on how tip income must be reported to claim the deduction. Importantly, eligible workers must provide their Social Security number on their return (and their spouse’s, if filing jointly).
To be deductible, tips must be:
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Reported properly to employers (if required)
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Earned in a qualified occupation
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Not exceed the $25,000 limit
Why It Matters
Supporters of the legislation—including service industry groups and some labor advocates—say this is a win for working-class Americans who rely on tips to make ends meet. In an era of rising costs and labor shortages in hospitality and food service, this measure could help attract and retain workers in industries hit hard by the pandemic and inflation.
Employers may also benefit if the tax savings boost morale and retention, though there are important caveats.
Critics Raise Concerns
Some labor groups and economists caution that this well-meaning measure may have unintended side effects. For example:
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Employers might reduce base wages, knowing workers are getting more after-tax income from tips.
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Non-tipped workers—like dishwashers, cooks, and cleaners—are excluded, potentially deepening wage disparities within teams.
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Higher-income tipped workers could disproportionately benefit, especially in luxury or high-end service environments.
There are also administrative concerns: will this lead to more underreporting of tips? Will it encourage employers to reclassify wages as tips?
What Should Workers Do?
If you’re a tipped employee, take these steps now:
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Keep accurate records of all tips received—both cash and credit.
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Report your tips properly to your employer to ensure they are tracked and included in your W-2.
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Consult a tax advisor early in 2026 to ensure you’re maximizing the deduction without running afoul of IRS rules.
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Stay informed—look out for IRS guidance this fall about how to apply the deduction and whether your job qualifies.
Bottom Line
The “No Tax on Tips” deduction could offer real relief to millions of workers—but like many tax laws, the benefits will depend on clear implementation and smart planning. Workers should be proactive, and employers should tread carefully to ensure they don’t shift burdens in a way that undermines the spirit of the law.
