Restaurant workers, bartenders, rideshare drivers, hotel staff, and other service employees often depend on tips for a large share of their income. The One Big Beautiful Bill Act created a new federal “no tax on tips” deduction, allowing eligible workers to reduce their taxable income by up to $25,000 of qualified tips from 2025 through 2028.
This article explains how the no tax on tips deduction works, who qualifies, income limits and phaseouts, how long the tax break lasts, and what records you must keep to claim every dollar you are entitled to at tax time.
What "No Tax on Tips" Means Under the One Big Beautiful Bill Act
Under the One Big Beautiful Bill Act, eligible workers can claim a federal tax deduction up to $25,000 for tip income.
How the IRS Taxes Tip Income
The IRS website says, “All cash and noncash tips received by an employee are income and are subject to Federal income taxes." The website also says, "All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer.”
Workers are taxed at different percentages, based on income brackets. For example, for tax year 2025, the lowest bracket ranges from $0 to $11,925 (single filers) and is taxed at 10%. So, filers in this bracket pay 10% on the first $11,925 reported as income. The next income bracket is taxed at 12%, so filers pay 12% on their income from $11,926 to $48,475. As you earn more income, the tax brackets go higher, meaning the percentage of tax increases.
Now, tipped workers who qualify can deduct up to $25,000 from their income. (You still report the tips as income, but you can take a deduction.)
No Tax on Tips Deduction Rules
Again, under this law, eligible taxpayers may deduct up to $25,000 in qualified tip income from their total taxable income. Amounts above this limit are subject to federal income tax.
Who Qualifies for the No Tax on Tips Deduction?
To qualify, you must work in a job that customarily and regularly receives tips. The Treasury Department provided a preliminary list of eligible jobs.
You don't qualify for the deduction if you work in a Specified Service Trade or Business (SSTB) such as accounting, law, health, actuarial science, athletics, performing arts, brokerage services, consulting, financial services, investing and investment management, or dealing in securities or commodities. (See 26 C.F.R. § 1.199A-5 (2026).)
Also, mandatory tips don't qualify.
No Tax on Tips Income Limits and Phase Out Rules
If you earn more than $150,000 per year ($300,000 for married taxpayers filing jointly), the deduction is reduced by $100 for every $1,000 you make over the limit. So, for a single taxpayer claiming the maximum $25,000, the deduction reaches $0 at $400,000 of modified adjusted gross income (MAGI). For a married couple claiming the maximum, the deduction reaches $0 at $550,000 of MAGI.
How to Claim the Deduction
You must file a brand new tax form called Schedule 1-A to claim the tax break on tips,
How Long Does This Tax Break Last?
The law is effective retroactively to January 2025, and expires at the end of 2028.
Does the No Tax on Tips Deduction Apply to State Income Taxes?
This law applies just to federal income taxes, not state or local income taxes.
Why Lawmakers Passed the No Tax on Tips Provision
Eliminating taxes on tips will provide tax relief to some tipped workers. It might also potentially reduce tipping expectations, which, in turn, would lower costs for consumers.
Recordkeeping and Reporting Requirements for the No Tax on Tips Deduction
All employees who work in industries where tips make up most of their income must report their earnings to their employers monthly. If you're a bartender, waiter, waitress, driver, or another employee who receives tips, you're expected to keep a record of how much you earn in tips each day.
This report is due on the 10th day of the month after the month the tips were received. This statement must be signed by you and include:
- your name, address, and Social Security number
- your employer’s name and address
- the month or period the report covers
- the total tips you received—including cash tips, tips paid by credit or debit card, and the value of any noncash tips you receive, such as tickets or items of value, and
- the amount of any tips you paid to other employees through tip pooling or splitting, or other arrangements, and the names of the recipients.
No report is required for any month your tips totaled less than $20.
How to Track Tip Income and Report It to the IRS
You can use various ways to do this recordkeeping and reporting. Many restaurants and other service businesses use electronic tip reporting systems. Such electronic point-of-sale systems make tip recordkeeping easier because the system automatically records tips on credit cards and prompts employees to enter cash tips, tip-outs, and tip-ins at the end of their shift. If your employer uses an electronic system, it must give you a paper copy of its record, which you should keep with your tax records.
You can also write information about your tips in a tip diary or keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.
For more information, see IRS Publication 531, Reporting Tip Income.
Where to Learn More About No Tax on Tips
To learn more about tax deductions under the One Big Beautiful Bill Act, see the IRS publication One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors.
If you need additional information, talk to a tax lawyer or other tax adviser, such as a certified public accountant.