What employers should know about ‘no tax on tips’

In its nearly 900 pages, the “One Big Beautiful Bill Act,” passed by Congress in July, includes a change to how tipped workers are taxed. The new “no tax on tips” provision is retroactive to the start of 2025 and runs through 2028. It allows eligible employees to claim an above-the-line deduction of up to $25,000 in tip income from their federal taxable income. Read on to learn more.

Who qualifies?

Employees and certain self-employed individuals may deduct tips received in occupations the Internal Revenue Service (IRS) identifies as “customarily and regularly receiving tips.” The IRS is expected to publish a list of qualifying occupations by October 2025.

Eligible tips must be properly reported on Form W-2, Form 1099, or Form 4137 and must be voluntary tips received from customers directly or through tip-sharing arrangements. Mandatory service charges or automatic gratuities don’t qualify. The deduction phases out for individuals with a gross income of over $150,000 for single filers and $300,000 for joint filers.

What does this mean for employers?

The new provision places little burden on employers. The deduction is claimed by employees on their individual tax returns, and employers aren’t responsible for filing or managing the deduction.