The One Big Beautiful Bill: What to Know About the “No Tax on Tips” Deduction
This article is part of Reinspired Books’ One Big Beautiful Bill Series — covering new federal deductions for 2025–2028.
You can also read:
Each deduction applies at the tax return level, not per paycheck. Click any link above for details.
Overview
The One Big Beautiful Bill created a new federal income tax deduction for people who earn tips in occupations that traditionally receive them. This deduction begins with the 2025 tax year and continues through 2028, unless extended by Congress.
Tips are a core part of income for millions of workers in restaurants, salons, hospitality, and other service-based professions. The bill provides a defined deduction for that income category.
The deduction applies when you file your taxes, not through paycheck withholding. Employers will continue regular payroll tax withholdings for income, Social Security, and Medicare until the IRS releases official implementation guidance later in 2025.
How It Works
- Maximum deduction: Up to $25,000 per year
- Who qualifies: Employees and certain self-employed individuals in eligible occupations
- Where to claim: New Schedule 1-A (Part I) of Form 1040
- Availability: Applies whether you itemize or take the standard deduction
- Duration: 2025 through 2028
This deduction is available whether or not you itemize — it’s an above-the-line deduction that directly lowers taxable income.
What Counts as a Tip
The law defines “qualified tips” as voluntary cash or charged tips received directly from customers or through tip pooling or sharing arrangements.
Automatic gratuities don’t count.
Only voluntary tips qualify for the deduction.
And while the bill itself refers to “cash tips,” the IRS definition of “cash tips” is broader — it includes:
- Credit and debit card tips,
- Shared tips
- Tips reported on Form W-2, Form 1099, or Form 4137.
So, whether a customer leaves $20 in cash or adds it to the card receipt, it counts — as long as it’s voluntary and properly reported.
Income Limits (Phase-Outs)
The deduction decreases for higher earners based on Modified Adjusted Gross Income (MAGI).
| Filing Status | Phase-Out Starts | Fully Phased Out |
|---|---|---|
| Single | $150,000 MAGI | $400,000 MAGI |
| Married Filing Jointly | $300,000 MAGI | $550,000 MAGI |
| Married Filing Separately | ❌ Not eligible | ❌ Not eligible |
Example:
A single filer earning $250,000 MAGI could deduct about $15,000 of tips—a 40% reduction from the $25,000 maximum.
Who May Benefit
Workers in industries where tipping is part of everyday income — and employers who accurately report it — will benefit most.
Examples include:
- Restaurant servers, bartenders, and baristas
- Salon and spa professionals (stylists, estheticians, nail techs)
- Hotel and hospitality staff
- Delivery and service providers who receive customer tips
At Coco Bella, for instance, servers and bartenders who report tips through the restaurant’s POS system will be able to deduct those amounts (up to $25,000 per year) on their 2025 tax return. The deduction won’t remove FICA or state tax on those tips — but it will reduce their federal taxable income when they file.
For hospitality owners like Coco Bella’s team, accurate reporting and records will be key to helping staff take advantage of this new benefit.
Self-employed workers (such as independent stylists or mobile bartenders) can also qualify, but the deduction can’t exceed their net income from the business that earned the tips..
Who Does Not Qualify
- Highly compensated employees (as defined under § 414(q))
- Workers in Specified Service Trades or Businesses (SSTBs) such as accounting, law, consulting, and financial services
- Married individuals filing separately
Important Details
- Employers must still withhold FICA and Medicare taxes on all tips.
- The IRS will release an official list of qualifying occupations by October 2025.
- To claim the deduction, taxpayers must include their Social Security Number, and if filing jointly, their spouse’s SSN as well.
- The deduction applies only at the federal level; state income tax rules may differ.
What to Do Now
If you work in a tip-based profession, you can prepare now for 2025:
- Keep accurate records of all reported tips throughout the year.
- Check that your employer reports tips correctly on your W-2 or Form 4137.
- Plan to claim the deduction when filing your 2025 tax return (in 2026).
- If self-employed, track tips and business income separately for proof.
Reinspired Books can help you understand how this new deduction affects your 2025 filing strategy — for both individual workers and business owners like Coco Bella.
Schedule your 2025 planning session at reinspiredbooks.com.
Want to see how the other new deductions compare?
Explore the rest of the One Big Beautiful Bill Series:
Book your 2025 planning session at reinspiredbooks.com.
