No Tax on Tips: 19 Things You Need to Know

Updated April 11, 2026

The tax law enacted July 4, 2025 (dubbed One Big Beautiful Bill, or OB3) includes a rule popularly called no tax on tips. There’s a lot to unpack here, including who qualifies, what qualifies, what limits apply, and much more.

Background

Taxation of tips poses problems

Restaurant servers, bartenders, hair stylists, and other service workers may receive a third or more of their pay in the form of tips. Taxing this form of compensation presents unique challenges for the government, the employer and the employee.

• IRS. When tips are left in currency, rather than charged or paid electronically, there is no immediate record of the amount, making it tempting to underreport. The IRS has developed systems aimed at controlling this problem, but cash tips by their nature invite noncompliance.
• Employers. Companies that employ tipped workers have paperwork and other obligations, including withholding income tax and employment taxes on the tip income and paying the employer share of employment tax on that income.
• Employees. Workers who receive tips may have difficulty predicting their income, as dollar amounts for any period will vary depending on the amount of business done and the generosity of customers. They have tax-related obligations other workers do not face. They have to maintain a daily record of amounts received, and report tips for each month to their employer by the tenth of the following month. If regular compensation isn’t enough to cover withholding on the total amount including gifts, workers have to pay a portion of their tips to the employer to cover the shortfall. See IRS Publication 531, Reporting Tip Income, for these requirements and penalties for failure to comply.

There are good reasons for taxing tips

Despite all these difficulties, there are good reasons for taxing tips.

Compensation. Tips don’t come from the employer, but they are plainly a form of compensation. You can’t receive tips if you aren’t providing services.

Minimum wage laws recognize that tips are a form of compensation. They permit employers to pay tipped workers less than others, if tips are enough to make up the difference.

Fairness. With no tax on tips, jobs in which tips are significant have an unfair advantage over other jobs.

Example: Darren and Karen are both single and both earn $60,000. Karen receives $40,000 in wages and $20,000 in tips. Darren does not receive tips for his work. With no tax on tips, Karen pays tax on only $40,000 of her income, while Darren continues to pay tax on the full $60,000. As a result, these two individuals have the same total earnings but Darren pays nearly twice as much income tax as Karen.

This kind of disparity will be hard enough to accept when Darren and Karen work for different employers. What if they work in the same restaurant, where Karen is a server and Darren is a cook? How will the owner cope with a situation where some employees pay tax on all their earnings while others pay far less?

No tax on tips is politically popular

No tax on tips may or may not be good policy. Without question, though, it is good politics. Polling during the 2024 presidential campaign indicated that roughly three-quarters of Americans favor the idea, with the percentage holding about equally across the political spectrum.

What’s more, politicians in both parties have a particular interest in courting votes from the large number of tipped employees in the purple state of Nevada.

Starting date

No tax on tips begins in 2025

Subject to restrictions described below, beginning in 2025 most tipped employees will pay less income tax. This tax benefit applies to all 2025 tips, including those received before July 4 when President Trump signed the new law.

Withholding rules change in 2026

While the tax rule changes in 2025, the same is not true for withholding. The first half of the year was history before the new tax law was passed. What’s more, this law doesn’t make it possible for employers to stop withholding on tip income immediately. OB3 directs the Treasury to provide new withholding rules to take effect in 2026.

When they file next year, many tipped employees can expect to see tax refunds that are larger than in previous years.

Who qualifies

You need to be in an eligible profession

To claim this benefit, you need to have a job that normally receives tips. Certain occupations are specifically excluded. Most of these will pose no issues. If you’re a lawyer or accountant, for example, you probably don’t receive tips anyway.

The law gave the Treasury until October 2, 2025 to publish a list of qualifying occupations. Proposed regulations offer a list that seems quite broad. (Proposed regulations are offered for comment before actual regulations, which may include changes, are adopted. Treasury will need to sort out circumstances where tips are received by individuals providing services in certain types of businesses, such as “performing arts,” may not be eligible.

Update: The Treasury has issued final regulations that include much discussion about various professions that were the subject of comments. Who knew Santa Claus received tips?

Special rules for gig workers and other non-employees

You can deduct tip income even if you aren’t an employee, but need to be aware of some special rules. First, the tip income has to be included on Form 1099-K or 1099-NEC. It appears you won’t be eligible if you didn’t earn enough to receive the form that would report this income.

The earnings threshold for Form 1099-K, previously $5,000, is $2,500, for 2025 and drops to $600 in 2026.

Also, the deduction is limited to your net profit from that activity. For example, if you had $6,000 in earnings, including $2,000 in tips, and also had $4,500 in deductible expenses, your tip deduction would be limited to $1,500.

If married, you have to file jointly

You can’t claim this deduction if your filing status is married filing separately.

You need a social security number

This deduction is allowed only if you include your social security number on your income tax return. Persons who are not United States citizens can meet this requirement if they are legally permitted to work in the U.S.

Qualified tips

Tips must be voluntary

Does your restaurant have a fixed tip for large parties? The deduction is not allowed for those payments. Tips have to be “paid voluntarily without any consequence in the event of nonpayment.” It seems odd that tips paid at one table in the restaurant won’t qualify while tips paid at others will, but the law seems to be clear on this point.

You need cash or charged tips

Tips received in a form other than cash are not eligible. The proposed regulations say that cash tips are

“tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are paid in a cash medium of exchange, including by cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash. Cash tips do not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets).”

Bad news, I’m afraid, for all the restaurant servers and hair stylists receiving tips in crypto.

How it works

It’s a deduction

You might be hoping this rule would allow you to simply pocket tips without any tax obligation. Sorry, no. You have the same reporting obligations as before. What’s changed is that you get to claim a deduction that matches some or all of the amount of tips you report.

Example: You earn $70,000, including $15,000 in tips. You’ll still show $70,000 of income on your tax return, but now you’ll have a $15,000 deduction that reduces your taxable income.

You don’t have to itemize

You can claim this deduction even if you don’t itemize. In other words, you can claim the standard deduction and also the tips deduction. And of course you can claim this deduction if you do itemize.

Recordkeeping headaches continue

Tipped workers will have to continue recording and reporting their tips as under prior law. Likewise, life won’t get any simpler for employers or the IRS.

It’s limited to $25,000

The maximum deduction for tips received is $25,000. If you make more than about $500 per week in tips, part of that income will be taxable.

Marriage penalty. This $25,000 limit is the same for married couples as for single taxpayers. Two individuals earning $20,000 each in tips can deduct the full amount while single. If they marry, $15,000 of their joint tip income becomes taxable.

There’s also a limit based on overall income

If you have more income than the typical tipped employee, your deduction may be reduced or eliminated. You lose $100 for each $1,000 your income is above $150,000 ($300,000 on a joint return).

Employment tax still applies

No tax on tips really means no income tax on tips. Social Security tax and Medicare tax continue to apply to tip income just as they have in the past. Generally this means a flat 7.65% tax on the full amount received.

Many tipped employees pay more in employment tax than income tax.

Final tips

Many tipped employees will receive no benefit

By one estimate, 37% of tipped employees have overall income too low to pay income tax. They can’t benefit from a deduction because they already pay zero.

It could go away in 2029

As written in One Big Beautiful Bill, the no tax on tips provision expires after 2028. Yet we saw earlier that the provision enjoys broad support across the political spectrum. It’s easy to go broke predicting what Congress will do, but it seems like a pretty good bet that we’ll see an extension of no tax on tips.

Related:

• One Big Beautiful Bill: 4 Ways You Might Save
• No Tax on Car Loan Interest