No Tax on Tips: What Changed for 2025 and What It Really Means

One of the most talked-about changes in the new tax law known as the One Big Beautiful Bill is the “No Tax on Tips” provision, which takes effect starting with the 2025 tax year. While the name sounds straightforward, the reality is a bit more nuanced — and worth understanding if you earn tip income.

What Is the “No Tax on Tips” Provision?

Despite the headline, tips are not completely tax-free. Instead, this new law creates a federal income tax deduction for eligible workers who receive tips.

Under the provision, qualifying taxpayers can deduct up to $25,000 of qualified tips from their federal taxable income each year. This deduction applies for tax years 2025 through 2028 and can be claimed whether you itemize deductions or take the standard deduction.

Who Qualifies?

You may be eligible if:

• You work in an occupation where tips are customary and regular (such as servers, bartenders, hairstylists, delivery drivers, and other tipped professions identified by the IRS)

• The tips are voluntary and paid by customers (not mandatory service charges)

• You properly report your tips to your employer or on your tax return

There are also income limits. The deduction begins to phase out at $150,000 of income for single filers and $300,000 for married couples filing jointly. Married filing separately generally does not qualify.

What Still Gets Taxed?

This is the most important clarification:

Tips are still subject to Social Security and Medicare taxes, and you must still report all tip income.

The deduction only reduces federal income tax, not payroll taxes, and it does not automatically apply to state income taxes unless your state adopts similar rules.

What Counts as a “Qualified Tip”?

Qualified tips must be:

• Voluntary (chosen by the customer)

• Cash or cash-equivalent (including credit card tips)

• Earned in a qualifying tipped occupation

• Properly reported

Automatic gratuities or service charges added by a business generally do not qualify.

Why This Matters

For workers who rely heavily on tips, this change could mean keeping more of what you earn. Depending on your income and tax bracket, the deduction could reduce your federal tax bill by hundreds or even thousands of dollars per year.

That said, the benefit is limited and won’t apply to everyone — especially higher-income earners or those who don’t receive substantial tip income.

The Bottom Line

The “No Tax on Tips” provision doesn’t eliminate taxes on tips, but it does introduce a meaningful new deduction for eligible workers starting in 2025. If you earn tip income, it’s important to understand how this rule applies to you and to make sure your tips are properly reported.

As always, tax law changes are complex, and individual results vary. If you’re unsure how this affects your situation, working with a tax professional can help you make the most of the new rules.

If you received qualifying tip income or qualified overtime income in 2025, you may need to have your last paycheck stub ready when it’s time to prepare your tax return since the W-2s likely won’t report the totals that will be needed to take the deduction on your tax return