After much debating, the One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025. In it, there are four pieces of new legislation that reflect initiatives President Trump supported during his presidential campaign: No Tax on Tips, No Tax on Overtime, a Car Loan Interest Credit, and a Senior Tax Deduction. Each of these are currently set as temporary and will apply to tax years 2025 (right now!) to 2028. Learn more about the details of the “No Tax on Tips” measure below.
How ‘No Tax on Tips’ Will Work
The amount of the deduction is up to $25,000 for each taxable year – starting now in 2025 and ending in 2028. This means you can reduce your Federal taxes on income by up to $25,000 as long as you earned that much in tips over the course of a year. For example, if you earn $60,000 in a year and $8,000 of that is tips, you can deduct that $8,000 and only pay Federal tax on $52,000 ($60,000-$8,000). If you earn $60,000 and $35,000 of that is tips, you can still only deduct up to the maximum of $25,000, so you will pay Federal tax on $35,000 ($60,000 – $25,000).
An important note is that unless your state changes its tax guidelines to match, you will still owe state tax on the full amount of income. Similarly, the entire tip amount will be included in your income and is subject to payroll taxes such as Social Security and Medicare.
It is an “above the line” deduction, which simply means that you do not need to itemize on your return – anyone who is eligible can take the deduction. The amount of tips earned will be stated on your W2 or 1099 and your accountant will be able to reduce your income by your tip amount.
The deduction has a phase-out for those earning higher wages. The deduction is reduced by $100 for each $1,000 of a taxpayer’s modified adjusted gross income (MAGI) for filers earning more than $150,000 (single) and $300,000 (married). For instance, a single filer with a MAGI of $160,000 has $10,000 over the limit. They must reduce their deduction by $100 for each $1,000 over the limit which means they can deduct $24,000.
Who Qualifies for No Tax on Tips
Customarily and Regularly Tipped
W2 and 1099
Beauty Industry
Tip Sharing
Service Charge
Not Eligible
Reporting Tips
Tips are meant to be treated as regular income and existing law states that employers must report tip amounts along with earned wages on an employee’s W-2. Tips left on credit cards are easy to include in this manner, but often, cash tips are the responsibility of an employee to report earnings to their employer. Legally, if an employee earns more than $20 in tips in a month, they are supposed to report their total to their employer as documentation of income.
Any undocumented tip income that is not represented on an employee’s W-2 or 1099 will not be eligible for this deduction.
For an employer, this will not require any changes in your payroll processes. The tip (and overtime) amounts will be reported as usual on the employee’s W2 or 1099 and the deduction will be taken on their personal tax returns.
Questions
Even though all of the specifics are not clarified, if you are in an industry that is customarily and regularly tipped, you can look forward to reduced income when you file next year. If you have any questions about this process, please contact our team.
Taylor Clinkenbeard, CPA
Taylor is a Manager in our tax and client accounting services teams. She has developed specific expertise in software, accounting processes, and tax laws to serve our clients.
