What does "no tax on tips" mean?

As part of the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, “qualified tips” now receive an above-the-line deduction on your federal tax return. So while tips aren’t entirely tax-free, a deduction with certain limits is provided for tax years 2025-2028.
 
Deduction limits & eligibility
  • Eligible taxpayers can deduct up to $25,000 per year in qualified tips. 
  • The deduction phases out for higher-income taxpayers
  • Phase-out begins at:
    • $150,000 modified adjusted gross income for single filers
    • $300,000 for joint filers
  • Qualified tips must be reported on a Form W-2, 1099, or through Form 4137 if self-reported and must come from occupations the IRS determines “customarily and regularly” received tips before 2025.
  • Tips are still subject to Social Security and Medicare taxes like regular wage income.
  • Income taxes on tips varies for each individual state, as not all states conform to the federal provision.
 
What counts as Qualified Tip Income
  • Voluntary cash tips
  • Credit card or electronic tips
  • Tips reported through an employer or platform
  • Those received in an occupation that customarily and regularly receives tips
  • Mandatory service charges do not qualify as tips.
 
Occupations that customarily and regularly receive tips
An occupation is considered to “customarily and regularly receive tips” if tipping is a normal, expected, and recurring part of compensation for that job, rather than occasional or incidental. The IRS has long used this standard in payroll and tip-reporting rules, and it is expected to apply the same framework for the new federal tip deduction.
 
Food & Beverage
  • Restaurant servers (waiters / waitresses)
  • Bartenders
  • Cocktail servers
  • Bussers and food runners
  • Baristas
  • Counter service staff who regularly receive tips
  • Delivery drivers (food and beverage)
 
Hospitality
  • Hotel bellhops
  • Valets
  • Concierge staff
  • Housekeeping staff (where tipping is customary)
  • Room service staff
 
Personal Services
  • Hair stylists
  • Barbers
  • Nail technicians
  • Estheticians
  • Massage therapists
  • Spa service providers
 
Transportation
  • Taxi drivers
  • Rideshare drivers (i.e. - app-based drivers)
  • Chauffeurs
  • Shuttle drivers (where tipping is customary)
 
Entertainment & Recreation
  • Casino dealers
  • Casino service staff
  • Golf caddies
  • Tour guides
  • Coat check attendants
  • Parking attendants
 
Occupations that generally DO NOT qualify
These jobs may occasionally receive tips, but tipping is not customary or regular:
  • Office or administrative staff
  • Retail sales associates (non-tipped retail)
  • Construction workers
  • Healthcare professionals (nurses, aides, technicians)
  • Teachers or instructors
  • Professional services (accountants, attorneys, consultants)
  • Salaried management positions
  • Owners or partners receiving business profits
  • Occasional gratuities or “thank you” payments do not convert a non-tipped job into a tipped occupation.