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Overview of No Tax on Tips as outlined in the OBBBA
- Effective for tax years 2025 through 2028, employees and self-employed individuals may deduct qualified tips they received in occupations the IRS identified as “customarily and regularly receiving tips” and are reported on a Form W-2, Form 1099, another statement furnished to the individual, or on Form 4137 if the individual directly reports the tips.
- “Qualified tips” include cash or credit card tips received from customers (including shared tips) where tipping has been customary and regular. These must be voluntary – rather than a negotiated service charge.
- The maximum annual deduction is $25,000.
- For self-employed individuals, deduction cannot exceed net income (before this deduction) from the trade or business where tips were earned.
- Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). The reduction is calculated as $100 for each $1000 above those thresholds.
Who qualifies?
- Individuals who:
- Have a Social Security number (SSN)
- Claim itemized or non-itemized deductions
Who does not qualify?
- Individuals who are:
- Self-employed in a Specified Service Trade or Business (SSTB) under Section 199A
- Employees of an employer in an SSTB
How to claim the deduction:
- Individuals who include their Social Security number on the return
- Individuals may file jointly if they’re married
Reporting Requirements:
- Employers and other payors must report certain cash tips and the occupation of the tip recipient on IRS (or SSA) information returns.
- Treasury and IRS will provide penalty relief for tax year 2025.
