- No Tax on Tips lets eligible workers deduct up to $25,000 in tips from federal taxable income.
- Applies to workers in tipped occupations where tipping was customary before Dec. 31, 2024.
- Deduction phases out above $150k AGI (single) and $300k AGI (joint).
- Only voluntary tips qualify; mandatory service charges do not.
- The benefit lasts through 2028.
No Tax on Tips is no longer just a campaign slogan—it’s now federal law under the One Big Beautiful Bill (OBBB) signed in July 2025. For millions of bartenders, servers, entertainers, and other service workers, this new provision could mean thousands of dollars in tax savings every year.
But who exactly qualifies? What counts as a “qualified tip”? And how much can workers actually deduct? This guide breaks down everything the IRS has clarified so far about the No Tax on Tips law—including eligibility, reporting requirements, income limits, and the practical impact on take-home pay.
Read the full story about what no tax on tips does for workers: https://t.co/i3OW7kmRzk
— One Fair Wage (@onefairwage) September 19, 2025
Spoiler Alert: It doesn't help us. #OneFairWage pic.twitter.com/ubXeJbHw2G
What Is the “No Tax on Tips” Law?
The No Tax on Tips provision is part of the One Big Beautiful Bill (OBBB), signed into law on July 4, 2025.
- It allows eligible workers to deduct up to $25,000 in qualified tips from their federal taxable income.
- The law applies to tax years 2025 through 2028.
- The goal is to provide relief for workers in tipped occupations by lowering their taxable income without requiring them to itemize deductions.
Importantly, this is not a total tax exemption on all tips. It’s a deduction—which reduces taxable income and therefore lowers the amount of federal income tax owed.
Who Qualifies for No Tax on Tips?
The IRS and Treasury have laid out clear eligibility rules. Workers must meet all of the following conditions to qualify:
| Requirement | Details |
|---|---|
| Occupation | Must be in a job where workers “customarily and regularly” received tips before Dec. 31, 2024. |
| Qualified Tips | Only voluntary tips from customers—cash, card, or pooled tips—are eligible. Mandatory service charges do not count. |
| Reporting | Tips must be reported to an employer (W-2) or reported directly by self-employed workers (Form 4137/1099). |
| Income Limits | Deduction phases out above $150,000 AGI (single) or $300,000 AGI (joint filers). |
| Filing Status | Married workers must file jointly to qualify. Workers also need a valid SSN. |
| Business Restrictions | Self-employed individuals in a Specified Service Trade or Business (SSTB) are excluded. |
NO TAX ON TIPS: Personal Services 📷 pic.twitter.com/y2l9PRCgkp
— The White House (@WhiteHouse) September 2, 2025
Occupations That Qualify
The IRS has published a preliminary list of 68 occupations that qualify, with the final list due in October 2025. Some examples include:
- Bartenders, waitstaff, and food servers
- Casino dealers and gaming staff
- DJs, clowns, entertainers, and musicians
- Content creators who receive direct tipping from fans
- Maids, housekeepers, and hotel staff
- Rideshare drivers, taxi drivers, and delivery workers
- Hairstylists, barbers, nail technicians, and spa workers
- Electricians, plumbers, landscapers, and other service workers (if tipping is customary)
What Counts as a “Qualified Tip”?
The IRS has drawn a sharp line between qualified tips and other payments.
Qualified Tips
- Voluntary cash or credit card tips from customers
- Tips distributed through a tip-sharing pool
- Tips reported on a W-2, 1099, or Form 4137
Not Qualified
- Mandatory service charges added by a business
- Pre-set gratuities that a customer cannot refuse
- “Convenience fees” automatically applied by restaurants or venues
- Non-cash perks or gifts that can’t be easily converted to cash
This distinction matters because only qualified tips can be deducted. If your paycheck shows “service charge” instead of “tip,” it won’t count toward the deduction.
IRS Reporting Rules for No Tax on Tips
For workers to benefit, tips must be properly reported. That means:
- Employees must report tips to their employer, who includes them on the W-2.
- Self-employed workers and contractors must report tips on their tax return (Schedule C or via Form 4137).
- Employers and payors must issue statements verifying the tips received and the occupation.
Failing to report tips could mean losing eligibility for the deduction—and risking IRS penalties.
How Much Can Workers Save?
The maximum benefit is a $25,000 annual deduction from taxable income.
Example 1: A Server Making $40,000 (Including $20,000 in Tips)
- Without the deduction: Taxable income = $40,000
- With deduction: Taxable income = $20,000
- Potential tax savings: $2,000–$3,000, depending on bracket
Example 2: A DJ Making $80,000 (Including $25,000 in Tips)
- Without deduction: Taxable income = $80,000
- With deduction: Taxable income = $55,000
- Potential tax savings: $4,000–$6,000
The actual benefit depends on filing status, bracket, and whether income exceeds the phase-out thresholds.
Phase-Outs: When No Tax on Tips Doesn’t Apply
The deduction begins to phase out when:
- Single filers earn over $150,000 AGI
- Married joint filers earn over $300,000 AGI
At higher incomes, the deduction gradually reduces until it disappears entirely. This means the benefit is designed to primarily help middle- and lower-income service workers, not high earners.
Common Misunderstandings About No Tax on Tips
The name makes it sound simple, but the details matter. Here are common misconceptions:
- “All tips are tax-free now.”
False. Only qualified tips up to $25,000 are deductible—not all tips, and not payroll taxes like Social Security/Medicare. - “You don’t have to report tips anymore.”
Wrong. Tips must still be reported to qualify. Failure to report disqualifies you. - “Mandatory service charges are included.”
Incorrect. Service charges are not voluntary tips and do not count. - “Self-employed workers can always deduct tips.”
Not true—if you operate in a Specified Service Trade or Business (like certain consulting professions), you’re excluded.
How Long Does No Tax on Tips Last?
The law applies through 2028, unless Congress extends it. That means eligible workers can take advantage for tax years 2025, 2026, 2027, and 2028.
If it isn’t renewed, the deduction will expire after December 31, 2028.
The No Tax on Tips law is one of the most significant tax changes for service workers in decades. For bartenders, servers, DJs, rideshare drivers, and countless others, it could mean real money back in their pockets—but only if they understand the IRS rules and report tips correctly.
For now, workers should:
- Keep accurate tip records
- Ensure tips are reported on W-2/1099/4137 forms
- Track their income to avoid phase-out limits
This deduction is temporary, so maximizing it between 2025 and 2028 could bring thousands in tax relief.
