Overview
In 2025, the “No Tax on Tips” provision, part of the landmark One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, introduced major changes to how tip income and employer tip-related tax credits are handled.
1. What the Tip Deduction Means for Workers
- Above-the-line deduction on tip income: Eligible tip-earning individuals can deduct up to $25,000 annually in tip income for tax years 2025 through 2028.
- Income phase-outs: The deduction begins phasing out for single filers earning above $150,000, and for joint filers above $300,000.
- Qualifying tips: Both cash tips and credit/debit card tips qualify for the deduction, as long as they are voluntary and properly reported. Tips received through pooling arrangements may also qualify.
- What doesn’t qualify: Service charges (such as automatic gratuities added by restaurants), non-cash tips (like tickets or gift cards), and tips processed through third-party payment apps (Venmo, PayPal, Cash App, etc.) are not eligible.
- Industries and occupations included: The Treasury Department identified 68 occupations, grouped into eight broad categories:
- Beverage & Food Service: bartenders, servers, cooks, dishwashers, bakers, fast-food staff, host staff.
- Entertainment & Events: gamblers, DJs, musicians, dancers, digital content creators, ushers, ticket takers.
- Hospitality & Guest Services: hotel clerks, bellhops, maids, concierges.
- Personal Services: nannies, tutors, pet care providers, event photographers, planners.
- Personal Appearance & Wellness: hairstylists, makeup artists, massage therapists, tattoo artists.
- Recreation & Instruction: golf caddies, tour guides, sports instructors.
- Transportation & Delivery: taxi drivers, delivery drivers, valets, boat operators, movers.
The Treasury aims to finalize and publish the full list in the Federal Register by October 2, 2025, providing official guidance.
2. Expanded FICA Tip Credit for Employers
Historically, the FICA Tip Credit allowed food and beverage employers to reduce federal income tax liability by claiming back the employer’s share of Social Security and Medicare taxes (7.65%) on reported tip income above the federal minimum wage.
With OBBBA, this credit has been expanded to include industries beyond food service, such as:
- Beauty and Personal Care Services: hair salons, barbershops, nail salons, spas, and esthetic services where tipping is customary.
The calculation still adheres to existing rules: tips used to meet minimum wage are excluded, and only the portion exceeding that threshold is eligible. Employers will continue to claim the credit via Form 8846, attaching it to their federal tax return. Any unused credit may be carried back one year or forward up to 20 years.
This expansion enables businesses in beauty services to enjoy valuable payroll tax benefits, improving cash flow and supporting fair reporting practices.
3. Key Notes for Workers & Employers
| Stakeholder | What to Know |
|---|---|
| Tipped Workers | Both cash and credit/debit card tips qualify for the deduction. Service charges, non-cash tips, and tips via third-party apps do not. Deduction applies only to qualifying occupations, with AGI-based phase-outs. The law covers 2025–2028 taxation years. |
| Employers | If in food/beverage or beauty/personal care industries with customary tipping, track tip reporting and calculate the FICA tip credit via Form 8846. Stay alert for IRS guidance and the finalized occupation list by October 2, 2025. |
Summary — And What’s Next
- For employees: The new tip deduction delivers significant direct tax savings (up to $25,000 per year) for those in qualifying occupations and income brackets.
- For employers: The expanded FICA Tip Credit under OBBBA offers an opportunity to reduce payroll-related tax burdens in beauty and food-service industries.
- Looking ahead: The IRS is expected to release final regulations and the complete occupation list in October 2025.
Frequently Asked Questions about the New Tip Deduction
Q: Do credit card tips qualify for the deduction?
Yes. Both cash tips and credit/debit card tips are eligible for the deduction as long as they are voluntary and reported properly.
Q: What types of tips do not qualify?
Non-cash tips (like tickets or gift cards), automatic service charges added by restaurants or venues, and tips received through third-party payment apps such as Venmo, PayPal, or Cash App do not qualify.
Q: How much can I deduct?
Eligible workers can deduct up to $25,000 of tip income per year from 2025 through 2028. This is a direct reduction of taxable income.
Q: Are there income limits for this deduction?
Yes. The deduction begins to phase out for single filers earning over $150,000 and joint filers earning over $300,000.
Q: Which jobs are covered?
The IRS and Treasury have identified 68 occupations where tipping is customary, spread across industries like food and beverage, hospitality, entertainment, beauty and wellness, recreation, personal services, and transportation. Examples include servers, bartenders, hairstylists, tour guides, taxi drivers, and hotel clerks.
Q: Does this change how employers handle tips?
Employers in industries with customary tipping—such as food service and beauty services—may now qualify for an expanded FICA Tip Credit. This allows them to reduce their share of payroll taxes on certain reported tip income.
Q: When will the IRS release the final list of eligible jobs?
The Treasury Department is expected to publish the final list in the Federal Register by October 2, 2025.