OBBBA no tax on tips is one of the most talked-about changes in the new tax law. It’s a temporary deduction from 2025 to 2028 that allows qualifying workers to exclude up to $25,000 of tip income from federal income tax. Here’s who qualifies, what counts as a tip, and how to claim it correctly.
From tax years 2025 through 2028, employees and self-employed individuals in occupations that customarily and regularly received tips on or before December 31, 2024 may deduct qualified tips from taxable income. Married taxpayers must file jointly to claim it, and a work-eligible Social Security number is required. The deduction is “below the line,” so it’s available whether or not you itemize.
Preliminary occupation lists include roles in restaurants (servers, bartenders, hosts, food runners; and, in some states, back-of-house workers in valid tip pools), hospitality (bellhops, valets, concierge, maids, doormen), personal care (hairstylists, barbers, nail techs, tattoo artists, body/spa workers, massage therapists), transportation (taxi/rideshare/delivery), and other services (baristas, dog groomers, casino dealers, golf caddies, tour guides). Certain specified service trades or businesses (SSTBs) are excluded (e.g., health, law, accounting, performing arts, athletics, consulting, financial services).
Qualified tips include cash or charged amounts (credit/debit) that are voluntary, set by the customer, and not negotiated. Service charges (for example, large-party auto-gratuities, bottle service, room service, contracted luggage assistance, mandated delivery fees) are not tips and are treated as wages. Suggested tip prompts on payment screens are commonly used; the current analysis is that these are still tips (not negotiated), but the IRS has not formally opined in this context.
To claim the deduction, tips must be reported to the IRS. Employees who receive $20 or more in cash tips in a month must report them to their employer by the 10th of the next month. Starting in 2026, employers and certain third-party payors/platforms will separately report qualified tips and the recipient’s occupation on Forms W-2/1099. For 2025, reasonable methods may be used to approximate separate tracking of qualified tips.
During 2025, employers continue withholding income and payroll taxes as usual; workers claim the deduction on their 2025 Form 1040 filed in 2026. For 2026–2028, IRS withholding tables will be adjusted so eligible employees see lower income-tax withholding during the year. Payroll (FICA/Medicare) withholding remains unchanged.
If you’re self-employed, any tips you deduct under OBBBA are excluded from qualified business income for the 20% QBI deduction calculation—you can’t double-count those tips for QBI purposes.
Sophia is a married hairstylist who rents a salon chair and reports all income on Schedule C. In 2025, she earns $42,000 in service income and $38,000 in customer tips. She can deduct $25,000 of those tips under OBBBA. At a 24% marginal tax rate, that saves about $6,000 in federal income tax (her self-employment and Medicare taxes remain unchanged).
IRS Topic No. 761: Tips – withholding & reporting
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