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Learn how the new No Tax on Tips law under the 2025 One Big Beautiful Bill lets service workers deduct up to $25,000 in reported tips. See who qualifies, how to claim it, and key employer rules.
On July 4, 2025, Congress passed the One Big Beautiful Bill Act of 2025 (OBBB), a sweeping tax package that included a landmark provision for service industry employees: the “No Tax on Tips” deduction. Folded into OBBB’s Section 70201, the law allows eligible workers to deduct up to $25,000 of reported tips from their federal taxable income for tax years 2025 through 2028.
This long-debated measure, sometimes referred to as the “No Tax on Tips Act,” fundamentally changes how service workers—from bartenders and servers to stylists and bellhops—calculate their taxable income. While Social Security and Medicare taxes still apply, the federal income tax relief could add up to meaningful savings for millions of workers.
Here’s everything you need to know.
The new law introduces a federal income tax deduction for “qualified tips.” Here are the highlights:
✅ Crucially, this deduction is available to all taxpayers—whether you itemize or take the standard deduction.
The IRS defines qualified tips as:
🚨 Important: The law does not change FICA (Social Security and Medicare) tax rules. All tips remain subject to payroll taxes, and state/local treatment may differ.
The IRS will publish the official list of eligible occupations no later than October 2, 2025. Until then, transitional relief applies for 2025 filings.
You’ll first report all tips exactly as before:
📌 No changes to 2025 withholding. The IRS has stated that paychecks will look the same this year. Workers will see the tax benefit only at filing time. Future years (2026–2028) may see updated withholding tables.
Example 1: Restaurant Server
Example 2: Bartender
Example 3: Self-Employed Stylist
OBBB also adds new reporting obligations for employers:
👉 Employers can monitor IRS updates through the Employment Taxes section of IRS.gov.
Supporters argue the deduction puts more money in the pockets of service workers and incentivizes accurate tip reporting. Critics counter that the benefit may be modest for lower-income workers who already pay little federal income tax, while higher earners in the service industry may benefit most.
The Joint Committee on Taxation estimates the fiscal cost of this provision is small relative to the overall OBBB package (Politico).
The No Tax on Tips deduction is one of the most immediately impactful provisions of the One Big Beautiful Bill Act of 2025. For tipped workers, it represents a rare, targeted benefit in the tax code—potentially worth thousands in savings each year.
But it’s not automatic: eligibility depends on your occupation, reported tips, and income level, and the benefit expires after 2028 unless Congress acts. For now, the smartest move is to track tips diligently, monitor IRS updates, and plan ahead for how this deduction fits into your broader tax strategy.
If you’re unsure how the law applies to you—or to your business—consider speaking with a qualified CPA or tax advisor who follows the latest OBBB guidance.
✅ Next Step: Bookmark the IRS OBBB Provisions Page for updates, and check back with Vincere Tax for practical strategies on how to maximize this and other new 2025 tax benefits.
Yes, if they’re voluntary and reported on a W-2, 1099, or Form 4137.
Not for 2025. The benefit comes when you file your return.
No. You must file jointly if married.
Yes, but only up to your net business income, and not if your trade is an SSTB.
Depends on your state’s conformity with federal law. Many will wait until 2026 legislative sessions to decide.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
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