Certain workers may now be able to keep more of what they earn, but what does "no tax on tips" really mean for employees and their employers?
The "One Big Beautiful Bill" recently passed by the U.S. Senate and House of Representatives, and signed into law by President Donald J. Trump on July 4, 2025, includes provisions for employees mandating no tax on tips and no tax on overtime provisions. The legislation will provide tax deductions for tipped servers and bartenders, and hourly employees who earn overtime premium pay.
What Employees Need to Know About No Tax on Tips
Effective for 2025 through 2028, employees and self-employed individuals may deduct "qualified" tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before Dec. 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.
The new law predominately benefits service-industry employees. For the next four years, restaurant servers and bartenders, for example, will be able to deduct $25,000 of their tips from their federal taxes, while hourly employees benefit from the $12,500 deduction for premium overtime pay.
According to the Internal Revenue Service (IRS), under the new law:" "qualified tips" are voluntary cash or charged tips received from customers or through tip sharing;
- maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual's net income (without regard to this deduction) from the trade or business in which the tips were earned; and
- deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
Deduction is available for both itemizing and non-itemizing taxpayers, while self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible, and employees whose employer is in an SSTB also are not eligible, according to the IRS. Additionally, taxpayers must include their Social Security Number on the return and file jointly if married, to claim the deduction.
Additionally, under the bill, the new tax deduction for tips is limited to cash tips:
- received by an employee during the course of employment in an occupation that customarily receives tips, and
- reported by the employee to the employer for purposes of withholding payroll taxes.
Further, an employee with compensation exceeding a specified threshold ($160,000 in 2025 and adjusted annually for inflation) in the prior tax year may not claim the new tax deduction for tips.
Finally, the bill expands the business tax credit for the portion of payroll taxes that an employer pays on certain tips to include payroll taxes paid on tips received in connection with barbering and hair care, nail care, esthetics, and body and spa treatments.
Under current law, an employee is required to report tips exceeding $20 per month to their employer.
What Employers Need to Know About No Tax on Tips
For reporting purposes, employers and other payors must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient.
By October 2, 2025, the IRS must publish a list of occupations that "customarily and regularly" received tips on or before December 31, 2024. The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.
Specifically, according to workplace fairness.org, employers are required to:
- report total tip income and employee occupation on Forms W 2 and 1099;
- update payroll/reporting systems to track qualified tips separately; and
- be mindful of existing tip-pooling and minimum-wage regulations (consult legal counsel before adjusting structures).
According to the National Restaurant Association, tax provisions in the bill critical to restaurant operators (employers) include:
- Full expensing for capital equipment purchases: Operators will be able to meet payroll and other expenses while investing in capital equipment or refurbishing their dining rooms.
- 20% qualified business income deduction: For the 77% of restaurants that are pass-through businesses, this will support investments in their operations and bring down their effective tax rate.
- Business interest expense deduction: This restores depreciation and amortization to the calculation of interest payment deductibility, freeing up capital to pay off debt, expand, or make additional investments.
- Permanent family and medical leave tax credits: Supports operators who choose to offer paid family and medical leave.
- Estate tax relief: Prevents the often-overwhelming tax hurdles that force families to sell or close a restaurant rather than the next generation continuing to operate it.
- No taxes on tips and no taxes on overtime, which includes a $25,000 tax deduction for servers and bartenders earning tips, and a $12,500 tax deduction of overtime premium pay for hourly earners. Both provisions will be available for workers from 2025 to 2028.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
