Beginning in 2025, tipped workers will see significant changes in their tax filings under the No Tax on Tips provision from the One Big, Beautiful Bill Act (OBBBA). Eligible workers will be able to deduct up to $25,000 in tips from their taxable income, marking a notable shift in how tip earnings are treated by the IRS.
The Treasury Department, along with the IRS, has released proposed regulations to clarify the details surrounding this deduction. These regulations build on previously shared informal guidance and include a comprehensive list of recognized tipped occupations. They also define what qualifies as a “qualified tip.”
To be eligible for the deduction, tips must meet specific criteria. They must be earned in a recognized tipped occupation, paid voluntarily by customers, and given in cash or its equivalent. Acceptable equivalents include payments via checks, credit cards, debit cards, gift cards, and items easily exchanged for cash. Surprisingly, this includes casino chips and virtual tokens from online streaming platforms; however, non-cash items like event tickets or services will not count. Mandatory service charges, added automatically to bills, will also be excluded from the deduction.
To claim the deduction, qualified tips must be reported to the IRS on specific forms, including W-2s and 1099s. The lesser-known Form 4137 is used for reporting unreported tips. Interestingly, while 2025 introduces new deductions, there won’t be any changes to Form W-2 for that tax year, as the IRS aims to streamline the transition period.
It’s essential to note that the deduction is capped at $25,000 per tax return, not per taxpayer. Couples cannot simply double the deduction amount, and the benefit phases out for high-income earners, beginning at $150,000 for single filers and $300,000 for married couples filing jointly. Those filing separately are not eligible.
While the new provision may help tipped employees, they will still owe Social Security and Medicare taxes on all tip income. The moniker “No Tax on Tips” could be misleading as it doesn’t eliminate these payroll taxes.
Certain occupations, particularly those listed as specified service trades or businesses (SSTBs), are excluded from this deduction, even if they typically receive tips. This includes fields like healthcare, law, and finance. Additionally, tips linked to illegal activities are not qualified for the deduction. The IRS has confirmed that businesses associated with unlawful activities, such as drug dealing or human trafficking, will not benefit from the provisions.
As part of preparation for 2025, treasury officials have indicated it will be regarded as a transition year. Reporting systems may not be fully ready to differentiate tip income from other earnings by then. The IRS plans to issue additional guidance to assist both workers and employers during this transition.
In support of these changes, the IRS has introduced a draft of Schedule 1-A, a new form to claim multiple deductions, including those for tips, overtime, and car loan interest. This form will integrate with the traditional tax return process to simplify calculations.
As these proposed regulations are subject to public comments and review before being finalized, discussions around the provisions will continue. A public hearing is scheduled for October 23, 2025, in Washington, D.C., allowing for further stakeholder input.
For taxpayers, particularly those in tipped occupations, keeping thorough records of tip income will be crucial as the tax landscape evolves. With ongoing updates expected, individuals are encouraged to stay informed through reliable sources.
