No Tax on Tips: What Taxpayers Should Know
Disclaimer: This material is prepared for informational purposes only, and is not tax advice. Please speak with a tax professional or view the resources at the bottom of this post to see how this information may apply to you.
With the passing of the One Big Beautiful Tax Bill (OBBB) in July 2025, a new deduction called “No Tax on Tips” has been introduced. It applies retroactively for tax years 2025 through 2028, meaning you’ll first see it reflected when filing your tax return in 2026.
Here are some answers to some frequently asked questions:
What does “No Tax on Tips” actually mean?
Despite its name, this act doesn’t make tips completely tax-free. Instead, it allows you to deduct your tips from your taxable income, lowering the amount of income tax you owe.
It’s important to note that payroll taxes (like Social Security and Medicare) and any state income or payroll taxes will still apply to tips.
How much is the deduction?
Eligible taxpayers can deduct up to $25,000 in tips; however, the actual amount of tax savings will depend on your tax bracket.
Additionally, there is a phase-out limit for single taxpayers with modified adjusted income over $150,000 and married filing joint couples with income over $300,000. For self-employed individuals, the deduction can not be greater than your net income.
What qualifies as a tip?
Tips must be voluntary, optional, and the amount of the tip must be chosen by the tipper.
Qualifying tips include:
Cash tips
Credit and debit card tips
Digital tips (through platforms like Venmo or PayPal)
Tips received through tip pooling
Mandatory service charges do not apply, such as auto-gratuity for large parties. These are considered non-tip wages and are treated as regular income.
Additionally, tips must be reported to the IRS on a W-2 if you're an employee and a 1099 if you’re self-employed or an independent contractor. That means any tips received “under the table” are not eligible.
Even if your employer or payment platform tracks your tips for you, you should keep your own records too. A simple log, spreadsheet, or tracking app will help you make sure your totals are right and provide documentation if the IRS ever audits you.
Who is eligible for the deduction?
According to a report from The Budget Lab, roughly 4 million workers held jobs that regularly received tips in 2023. If you’re wondering if your job qualifies, the IRS released a list of eligible occupations that customarily and regularly receive tips in the following industries:
Beverage and food service
Entertainment and events (entertainers, content creators)
Hospitality and guest services
Home services
Personal services (event planners, photographers, caretakers, tutors)
Personal appearance and wellness
Recreation and instruction (tour guides)
Transportation and delivery
Employees and self-employed individuals with listed occupations in these industries are eligible for the deduction. Additionally, this is an above-the-line deduction, meaning that taxpayers who don’t itemize on their tax return can still claim this deduction.
Taxpayers must also have a Social Security Number, and if married filing jointly, the spouse must also have a Social Security Number.
How do I report it on my tax return?
If you qualify for the “No Tax on Tips” deduction, here’s how the process works:
Keep reporting your tips as you normally would.
Expect taxes to be withheld from your paycheck as usual.
Claim the deduction when you file your tax return.
Simply put, it’s business as usual throughout the year. The only change comes at tax time, where you’ll have a spot on your tax return to claim the deduction.
Reminder: Tips must be reported to the IRS on a Form W-2 or 1099 to qualify for the deduction.
Need help filing?
At Northside Tax Service, we stay on top of the latest tax changes so you don’t have to. Whether you’re a server, hair stylist, driver, or in another occupation that regularly earns tips, we’ll make sure you get every deduction and credit you qualify for.
Call us at (360) 922-0235 to schedule an appointment or learn more about our services.