"No Tax on Tips," and What It Means for Tipped Workers

The recently passed "One Big Beautiful Bill Act" includes significant tax benefits for workers who earn tips. This landmark legislation, signed into law by President Donald Trump, notably consists of a provision offering a temporary deduction on tipped income. Here’s what tipped workers need to know about this change and how it impacts their finances.

Key Takeaways:

• Tipped workers can deduct up to $25,000 in qualified tips from taxable income.

• Applies to both W-2 employees and independent contractors.

• Deduction phases out at incomes above $150,000 ($300,000 joint filers).

• Temporary measure effective from tax years 2025 through 2028.

• Employers benefit from extended Section 45B credit for Social Security taxes on tips.

What Exactly is the “No Tax on Tips” Provision?

Under this new provision, tipped workers can deduct up to $25,000 of qualified tips from their taxable income. This applies to both employees, who typically receive IRS Form W-2, Wage and Tax Statement, and independent contractors who report their tips via IRS Form 1099-K, Payment Card and Third Party Network Transactions, IRS Form 1099-NEC, Nonemployee Compensation, or IRS Form 4137, Social Security and Medicare Tax On Unreported Tip Income.

This deduction is considered an "above-the-line" deduction, meaning workers can benefit from it regardless of whether they claim the standard deduction or itemize their deductions. However, the deduction begins to phase out for taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds $150,000 (or $300,000 for joint filers). This temporary deduction is set to last from tax years 2025 through 2028.

Who Benefits Most?

This new provision primarily benefits workers in industries where tips constitute a significant portion of income, such as:

• Restaurant and hospitality employees

• Beauty service professionals (hairstylists, barbers, aestheticians)

• Gig workers and independent contractors in other tip-heavy industries

For these workers, reducing taxable income means more money staying in their pockets each year. Preview how much you can save by using the Tax-Free Tips & Overtime Calculator (in the middle of the page) on the White House’s official website. 

How Does It Impact Employers?

Alongside benefits for tipped workers, the bill also extends the Section 45B credit, allowing employers to claim a portion of the Social Security taxes they pay on employee tips. This specifically includes certain beauty service businesses, providing additional financial relief to employers in industries that rely heavily on tips.

Navigating the Tax Implications

Even with beneficial changes, navigating the evolving tax landscape can be complicated. Partnering with the trusted experts at 1-800Accountant, America’s leading virtual accounting firm, can help you maximize your benefits and comply with ever-changing tax laws. Our dedicated CPAs, EAs, and tax professionals provide affordable, tax-deductible tax advisory services year-round, explicitly tailored to small businesses and independent professionals impacted by the rule changes governing tips. 

From proactive tax planning and quarterly estimates to comprehensive small business tax preparation and business tax advisory services, our goal is straightforward: to save you time, reduce your tax burden, and enable you to focus on your next business milestone.

What Should You Do Next?

• Consult a CPA: Schedule a consultation to evaluate how these changes affect your financial situation.

• Review Your Earnings: Determine your eligibility based on your MAGI and potential deductions.

• Stay Updated: Laws and tax guidelines are subject to change. Staying informed ensures you maximize every available benefit.

Final Thoughts

The "No Tax on Tips" provision offers significant tax relief for millions of tipped workers, aligning closely with broader legislative efforts to support workers and small businesses. Understanding these benefits and working with trusted financial experts can help you fully capitalize on these new opportunities.

For personalized support to maximize these tax advantages, visit 1-800Accountant today and schedule your free, complimentary 30-minute consultation.