The No Tax on Tips deduction established by the One Big Beautiful Bill Act (OBBBA) went into effect retroactively starting January 1, 2025.

The IRS announced that 2025 is a transition year and the deduction will work very differently for 2025 than for all future years.

Overview of the New Tips Deduction

Taxpayers who work in customarily tipped occupations can exclude from taxable income up to $25,000 annually in voluntarily paid cash tips during 2025 through 2028 (but the deduction is phased out for tipped workers with modified adjusted gross incomes over $150,000 or $300,000 for joint filers).1

The IRS has identified 68 different customarily tipped occupations that qualify for the deduction.2

Tip Reporting for 2025

The tips deduction statute provides that the deduction is allowed only for qualifying tips that are reported to the IRS.

For employees, such tips must be reported by the employer on Form W-2, or reported by the employee to the IRS on Form 4137, Social Security and Medicare Tax on Unreported Tip Income.3

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