The No Tax on Tips Act is a proposed federal bill that would make employees’ tips exempt from federal income and payroll taxes. In other words, service workers could keep the full amount of their earned tips without having them taxed by the IRS. This legislation aims to boost take-home pay and ease financial pressure on tipped employees across industries like restaurants, salons, and hospitality.
Join the professional tax consultants at Steward Ingram & Cooper, PLLC, as we explore how the No Tax on Tips bill works, who it benefits, and how it could impact both employees and business owners if it becomes law.
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Understanding the No Tax on Tips Bill
In July 2025, Congress passed the One, Big, Beautiful Bill,, which included a provision commonly known as “No Tax on Tips”. Under this change, many workers who customarily and regularly receive tips may deduct a portion of those qualified tips from their taxable income—reducing income taxes, though payroll taxes and reporting requirements remain in place.
The law applies for the 2025–2028 tax years, and the Treasury Department and IRS are actively moving from proposed regulations toward final guidance.
Who Is Eligible for No Tax on Tips
The deduction targets workers in occupations that customarily and regularly receive tips, as identified in a preliminary list published by the Treasury Department and IRS. Both W-2 employees and qualifying self employed individuals may claim it in applicable roles. Final eligibility will be governed by regulations adopted after public comment.
What Counts As A Tip Under the Bill
To be “qualified,” a tip must be paid voluntarily by a customer (cash or card). Service charges added by the business don’t count. Amounts received through tip pooling or tip sharing, when properly documented, also qualify.
Deduction Amount and Years Covered
Between 2025 and 2028, eligible filers may deduct up to $25,000 of qualified tips per return. The deduction is applied to income taxes, not payroll taxes. You’ll claim it in the tax year for which the tips were earned (for example, tips earned in 2025 are claimed when you file in 2026).
Income Limits and Phaseouts
The benefit slowly phases out as your modified adjusted gross income increases. Joint filers who file jointly face different thresholds than single filers. If your MAGI is high, you may not receive the full deduction amount.
Payroll Taxes Still Apply
This deduction does not remove FICA or Medicare obligations. Employers must continue withholding and remitting payroll taxes on reported tips, and employees still owe Social Security and Medicare contributions tied to tip income.
Reporting Requirements Continue
You must continue following standard reporting rules for tips received, including itemizing daily or weekly tips and separately tracking pooled receipts. The IRS has emphasized keeping clear documentation to support tax deductions.
Effective Date and Future Rules
While the law is enacted, many details are still subject to proposed regulations and public comment. The Treasury Department is reviewing feedback before issuing a final version. Stay updated via Federal Register notices and IRS releases.
No Tax on Tips Explained by Occupation
Workers who customarily and regularly receive tips may be eligible for no tax on tips. The Treasury Department lists occupations across eight categories. Below are examples frequently seen in hospitality, tourism, personal services, transportation, recreation, and home services in our area that may be eligible for the new provision.
Hospitality and Food Service
- Wait staff
- Host staff
- Food preparation workers
- Cafeteria attendants
- Room attendants and housekeeping cleaners
Travel, Recreation, and Gaming
- Baggage porters and lobby attendants
- Gambling dealers, change persons, and sports book writers
- Water taxi operators and charter boat workers
- Carriage drivers
Home and Trade Services
- Home appliance installers, HVAC mechanics, and home movers
- Home landscaping crews and groundskeeping workers
- Shoe and leather workers, and broader leather repair trades
Personal Appearance and Wellness
- Tattoo artists
- Group fitness instructors
- Pet caretakers
Tips vs. Service Charges: What Counts for the Deduction
Before you claim the no tax on tips deduction, make sure what you received meets the legal definition.
Filing for No Tax on Tips
The tax on tips deduction is subject to deduction phases based on your modified adjusted gross income. Thresholds differ for joint filers who file jointly versus single filers. If your MAGI is too high, the benefit may phase down or out even if you regularly received tips.
How To Claim It On Your Return
For each tax year 2025–2028, add up your qualified tips that were customarily and regularly received in a listed role. Claim the new deduction on your federal return separate from the standard deduction. For planning purposes, keep a monthly tally of tips paid and employer records to streamline substantiation.
No Tax on Tips FAQs
What is the no tax on tips rule?
Are tips still being taxed in 2025?
Yes. The no tax on tips provision lowers tax on tips through a tax on tips deduction, but tips remain subject to withholding and payroll taxes and must meet reporting requirements. You still report tips received even when claiming the new deduction.
When does no tax on tips start?
Did the no tax on tips and overtime bill pass?
Yes—the provision is part of the enacted big beautiful bill act signed in July 2025.
When will no tax on tips go into effect?
It applies for the 2025–2028 period. For 2025, you’ll claim the tax on tips deduction on the return you file in 2026.
Contact Our Raleigh Tax Consultants for Guidance Today
Are you looking for assistance on tax filing or bookkeeping? Steward Ingram and Cooper, PLLC takes on a limited number of clients each year. To inquire about our current availability and timeline, please fill out the contact form below or give us a call today at (919) 872-0866.
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