The One Big Beautiful Bill includes a change to how tipped workers are taxed: the new “No Tax on Tips” provision is retroactive to the start of 2025 and runs through 2028. It allows eligible employees to claim an above-the-line deduction of up to $25,000 in tip income from their federal taxable income.
Who qualifies?
Employees and certain self-employed individuals may deduct tips received in occupations that the IRS identifies as “customarily and regularly receiving tips.” The IRS is expected to publish a list of qualifying occupations by October 2025.
Eligible tips must be properly reported on Form W-2, Form 1099, or Form 4137, and must be voluntary tips received from customers directly or through tip-sharing arrangements. Mandatory service charges or automatic gratuities do not qualify. The deduction phases out for individuals with gross income over $150,000 for single filers or $300,000 for joint filers.
What does this mean for employers?
The new provision places little burden on employers. The deduction is claimed by employees on their individual tax returns and employers are not responsible for filing or managing the deduction.
However, because employees can only deduct properly reported tip income, employer recordkeeping must be accurate and up to date. That means:
- Continue tracking tips carefully through workplace systems and payroll.
- Ensure tips are separately identified on employees’ Form W-2.
- Maintain clear and accurate job titles, as only workers in qualifying occupations will be eligible.
It is also important to note that this new deduction does not affect employer payroll tax obligations. Tips remain subject to Social Security and Medicare taxes, and must be reported accordingly.
Bottom Line:
While there is no new filing to manage on the employer side, accurate recordkeeping and clean tip reporting are essential to help employees benefit and keep employers compliant.