🍽️ What’s Changed for Tipped Workers?
- alison882
- Jul 19
- 2 min read
On July 4, 2025, President Trump signed the One Big Beautiful Bill (also referred to as the BBB) into law. Alongside sweeping tax reforms, it includes a headline provision: no federal income tax on up to $25,000 in tips per year for eligible workers—effective for tax years 2025–2028
Eligible Income: Cash tips received by workers who customarily and regularly receive tips—think servers, bartenders, hairstylists—as of December 31, 2024
Deduction Limit: Up to $25,000 per individual (joint filers share a combined limit).
Phase-out: Gradually reduced for individuals with Modified AGI above $150,000 (phases out entirely by $400K AGI; joint phase-out begins at $300K)
Not Payroll-Related: Social Security and Medicare taxes still apply. Employers must continue to withhold and report tips via Form W‑2 or Form 1099 for nonemployees
Retroactive to Jan 1, 2025, through Dec 31, 2028
What It Isn’t:
Not a full repeal of tip taxation: only applies as a deduction to federal income tax, not payroll taxes or state/local tax
Cash-only: Tips paid electronically (e.g., card tips) do not qualify.
Tied to traditional roles: You need a work-eligible Social Security number, and your occupation must have historically qualified by end of 2024
Why This Matters
Tax Savings: A server earning $30,000/year with $20,000 in cash tips could fully exempt that $20K from federal income tax—sizable tax savings come April 2026.
Simplified Tax Treatment: The above-the-line deduction is claimed directly on Form 1040—no need for itemizing.
Transitional Year Reporting: For 2025, employers may use reasonable methods to approximate tip amounts on W‑2s. Detailed guidance is anticipated for 2026 and beyond
Policy Implications: Advocates see it as rewarding service-sector workers and aligning with campaign promises, but critics note it benefits higher earners and could encourage tip under-reporting
What You Should Do Now
Track Tip Income: Keep meticulous records—daily logs, employer spot—to support your deduction claim.
Consult a Tax Professional: Especially if your tips approach or exceed the $25K threshold, or your MAGI is near phase-out levels.
Stay Updated: The Treasury and IRS must publish guidance—including a list of qualifying roles—within 90 days of the law’s enactment
Plan Withholdings: Since payroll taxes still apply, factor this into budgeting and paychecks.
In Summary
The BBB’s “No Tax on Tips” provision marks a significant shift for tipped workers—from servers and stylists to baristas—by offering relief on cash tip income from 2025 through 2028. While not a total repeal of tip taxation, it's a meaningful tax break with caveats: income and occupation limits, phased eligibility, and reporting nuances.
As the IRS and Treasury release further details in the coming months, service workers should gear up—tracking income, understanding thresholds, and preparing for smoother tax filing next spring.
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