New “No Tax on Tips” Law Offers Federal Tax Relief for Tipped Workers

WASHINGTON, D.C. — A new federal tax provision included in the One Big Beautiful Bill Act, signed into law in 2025, introduces a significant change for workers in traditionally tipped occupations by creating a new deduction for tip income. Under the No Tax on Tips provision, eligible workers can deduct up to $25,000 of qualified tips from their federal taxable income for tax years 2025 through 2028.

The law is designed to reduce federal income tax burdens on workers who rely on customer gratuities as a substantial part of their earnings. To qualify for the deduction, tips must be voluntarily given by customers, received in customary tipped occupations, and properly reported for tax purposes. Employers continue to report tips on employees’ W-2 forms, and employees must still follow all reporting requirements.

While commonly referred to as “no tax on tips,” the provision does not completely eliminate all taxes on tips. Eligible workers may exclude up to $25,000 in qualified tips from federal taxable income, but tips are still subject to payroll taxes such as Social Security and Medicare, and may be subject to state and local taxes depending on jurisdiction.

The deduction begins phasing out for individuals with higher incomes — generally starting around $150,000 for single filers and $300,000 for married couples filing jointly — and is set to expire after the 2028 tax year unless extended by Congress.

The move represents a rare bipartisan effort to provide targeted income tax relief for service workers such as servers, bartenders, hairstylists, delivery drivers, and other roles where tipping is customary. Taxpayers will first be able to claim the deduction when filing their 2025 tax returns in 2026.