With both major political candidates endorsing the idea during the 2024 U.S. presidential election, it comes as little surprise that “No Tax on Tips” is now law. On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA), a sweeping piece of legislation that includes a federal income tax deduction for certain tip income earned by workers in tipped occupations. This provision will significantly impact many service industry workers. Here’s what you need to know to prepare:

• The OBBBA allows eligible taxpayers to deduct up to $25,000 per year in qualified tip income received between 2025 and 2028. This applies to both W-2 employees, and independent contractors or self-employed individuals who receive tips and report them on Form 1099-K, Form 1099-NEC, or Form 4137 (Social Security and Medicare Tax on Unreported Tip Income).
• This deduction is limited to occupations in industries where tipping is considered customary and regular. For example, workers in the food service and hospitality industries are expected to qualify. However, professionals like tax advisors—your friendly team here at BCS—will not be eligible. The IRS is required to publish a full list of qualifying occupations by October 2, 2025, or within 90 days of the bill’s enactment.
• The maximum allowable deduction is $25,000 per year, and it begins to phase out once your modified adjusted gross income (MAGI) exceeds: $150,000 for single filers, or $300,000 for married couples filing jointly. The deduction is reduced incrementally as income rises above these thresholds and is fully phased out at higher income levels.
• To qualify for the deduction, the tip must be voluntarily given by a customer, not part of a mandatory service charge, and not automatically included in the price of a service or product. Cash tips, credit card tips, and tips distributed through tip-sharing arrangements are all expected to qualify. The IRS is expected to issue additional guidance on this definition by year-end.
• Importantly, while the deduction will reduce federal income tax, tip income will still be subject to payroll taxes, including Social Security and Medicare.
• The “No Tax on Tips” deduction applies for tax years 2025 through 2028. This means the first opportunity to claim the deduction will be on your 2025 tax return, filed in 2026. Eligible taxpayers will be able to take this deduction whether you itemize or take the standard deduction. Start tracking your eligible tips now to ensure you’re prepared to claim the deduction next year.

As with any new tax law, we expect the IRS to release further clarification and implementation guidance in the coming months. Be sure to stay informed and contact your BCS tax advisor with any questions about how the “No Tax on Tips” deduction might apply to you.