Congress recently introduced a new tax break under the One Big Beautiful Bill Act (OBBBA), and it’s already making headlines. It’s called the “No Tax on Tips” deduction, and while the name sounds huge, the actual benefit is more limited than most people realize.

If you earn tips or employ people who do, here’s what you really need to know before the rule kicks in for 2025.

Who Actually Qualifies for This Deduction?

This deduction is not for everyone. It applies only to workers in industries where tips are customary and expected.

This includes:

• Servers and bartenders
  
• Hotel staff
  
• Hairstylists and barbers
  
• Rideshare and taxi drivers
  
• Baristas
  
• Casino dealers
  

The IRS has a full list, but the bottom line is simple: if tips are a normal part of your job, you’re probably in.

However, workers in fields like:

• Healthcare
  
• Law
  
• Accounting
  
• Consulting
  
• Financial services
  
• Performing arts
  
• Athletics
  

cannot claim this deduction. Even if someone tips you occasionally, your occupation must fall under the IRS-approved list.

What Actually Counts as a Tip?

To qualify, the payment must meet the IRS definition of a true tip:

✔ Voluntary
✔ Determined by the customer
✔ Paid in cash or by card

This means:

• Service charges
  
• Negotiated payments
  
• Mandatory fees
  

are not considered tips and can’t be deducted.

How Much Can You Deduct?

Here’s where things get interesting:

• The deduction applies from 2025 to 2028.
  
• Workers can deduct up to $25,000 per year in eligible tips.
  
• Self-employed workers cannot deduct more than their net business income.
  
• The deduction phases out for taxpayers with income above:
  
  • $150,000 (single)
    
  • $300,000 (married filing jointly)
    

Because the deduction lowers taxable income not payroll taxes, the savings depend on your tax bracket.

For example:

If you’re in the 22% tax bracket and earn at least $25,000 in tips, you could save $5,500 in income tax.

But if you owe very little federal income tax already, you may see little to no benefit.

Also important:
This deduction does not reduce Social Security or Medicare taxes.

What Tipped Workers Need to Do

To claim the deduction, you must report your tips to the IRS.
Employees receiving cash must give their employer a record of total tips received.

Only reported tips count.
If you don’t report it, you can’t deduct it.

What Employers Need to Know

Starting in 2026, employers and platforms like Uber, DoorDash, or PayPal must begin separately reporting:

• The worker’s occupation
  
• Eligible cash tips
  

Here’s how that will look:

• Employees will see the info on Form W-2
  
• Independent contractors will receive Form 1099-NEC or 1099-K
  

For the rest of 2025, nothing changes. Employers must continue withholding taxes on all wages just like before.

In 2026, the IRS will roll out updated withholding tables to reflect the new deduction.

The new “No Tax on Tips” deduction can be incredibly valuable for workers who rely heavily on tips but it’s not as broad as it sounds. Knowing whether you qualify, tracking your reported tips, and preparing for new reporting requirements can help you get the full benefit without surprises later.

If you want help navigating the rules or setting up proper reporting systems for your business, Basc Expertise is here to guide you every step of the way.