On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act. One of its provisions has been dubbed “no taxes on tips” and provides a tax deduction of up to $25,000 for tips received by employees. The provision is retroactive to January 1, 2025, so certain payroll and reporting changes must be made for the current tax year.
Understanding the Basics
The bill establishes a new tax deduction for tips, subject to some limitations:
- The tips must be received in an occupation that customarily receives tips, such as a service or hospitality occupation. The Treasury Department is required to publish a list of qualifying occupations by October 2025. Note that certain professionals are explicitly excluded, including those in the fields of law, accounting, health care, and consulting, among others.
- Only voluntary tips are included; mandatory service charges or automatic gratuities are excluded.
- Employees will still pay state income tax on tips unless similar laws are passed at the state level.
- The deduction is capped at $25,000 and phases out for employees whose adjusted gross income exceeds $150,000 or $300,000 for joint returns. But the deduction is available regardless of whether the employees take the standard deduction or itemize.
What Employers Need to Know
Here are a few things about the “no tax on tips” provisions you need to know:
- Accurate accounting of tips received will be even more important and must be reported, likely in a new line or box on Form W-2.
- Because the law is retroactive, you must take steps to comply in the current year. It’s expected that “reasonable estimates” will be permitted for the current year, but you should document your methods of estimation.
- Some employers may be eligible for a Federal Insurance Contributions Act (FICA) tip credit because it has been expanded from food and beverage service businesses to many beauty service businesses, including hair care, nail care, spa treatments, and the like.
- FICA withholding remains the same and applies to all reported tips.
- Changes to withholdings may occur in future years.
The new tax deduction can provide tax relief for certain tipped employees. Although it won’t result in increased paychecks, it will reduce the tax burden or result in a larger tax refund for some employees.
To take full advantage of the tax savings, you may wish to reconsider your business practices and pricing systems, such as moving away from service charges and/or automatic gratuities so the tips qualify under the new law. If tips are pooled, it will be important to assess whether all positions participating in the tip pooling will be eligible for the tax deduction because some occupations don’t customarily receive tips.
Currently the “no taxes on tips” provisions are set to expire in 2028. Until then, take steps with your payroll systems to accurately track qualified tips so your tipped employees reap the benefits of this law. Because this is a developing issue, more guidance is expected in the future.
Christi R.B. Stover is an attorney with Steptoe & Johnson PLLC in Morgantown, West Virginia, and can be reached at 304-285-6835 or christi.stover@steptoe-johnson.com.