The One Big Beautiful Bill Act of 2025 introduced a significant shift in how tipped income is treated for federal tax purposes. Beginning in tax year 2025, workers in occupations that customarily and regularly receive tips are eligible for a new federal income-tax deduction designed to reduce their taxable income. Under this provision, individuals may deduct up to $25,000 per year in qualified tips, which include voluntary customer tips paid in cash, by card, or through tip-sharing arrangements. There is a phase-out in effect for this deduction, ranging from $75,000 to $150,000 for single filers and $150,000 to $300,000 for married couples.
While this new deduction lowers federal income-tax liability, it does not change the long-standing requirement that tips be subject to payroll taxes such as Social Security and Medicare. It also does not apply to mandatory service charges or to occupations that have not historically received tips. The measure is temporary and is currently scheduled to expire after the 2028 tax year unless extended by future legislation.
The “no tax on tips” provision represents a substantial tax benefit for millions of service-industry workers by reducing the amount of tipped income subject to federal income tax, while still preserving established payroll-tax rules. Understanding how this deduction works and its limitations will allow workers and employers to take full and accurate advantage of the relief it provides during the years it remains in effect.
Written by Erik Handshoe CPA, Senior
