No Tax on Tips February 1, 2026
/🇺🇸 No Tax on Tips — What It Is and Why It Matters
A Guide to the New Tax Law from the One Big Beautiful Bill
On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (often called OBBB or OBBBA), a sweeping federal tax and budget measure that includes a series of high-profile tax cuts and deductions. Among them is the provision popularly known as “No Tax on Tips.” But what does that phrase really mean for working Americans? Let’s break it down.
🧾 What “No Tax on Tips” Actually Is
Contrary to the catchy slogan, this provision doesn’t make tips tax-free in the absolute sense — it creates a new federal income tax deduction for qualifying tip income. That deduction can reduce how much of your tip income is subject to federal income tax, lowering your overall tax bill.
Here’s how it works:
🧮 Deduction up to $25,000: Eligible workers can deduct up to $25,000 of reported tip income per year from their federal taxable income.
📅 Applies to tips earned 2025–2028: The deduction is temporary — it’s effective for tax years 2025 through 2028 unless future laws extend it.
📊 Phase-out for higher earners: The benefit begins to phase out for single taxpayers with modified adjusted gross income (MAGI) over about $150,000 and married couples over $300,000.
📄 Reported tips only: To qualify, tips must be reported on official tax forms such as W-2s, 1099 forms, or Form 4137. Employers must report the amount of cash tips and the occupation to the IRS.
🍽️ Who Benefits from the Deduction
This deduction applies to workers in occupations that customarily and regularly receive tips — think restaurant servers, bartenders, taxi & rideshare drivers, hairstylists, and similar service roles. The U.S. Treasury and IRS have issued guidance with a list of eligible jobs.
For many tip-dependent workers, this could increase take-home pay, providing an extra boost during tax filing season or throughout the year. Some estimates suggest the average tax advantage for tipped workers could be significant — often described as a meaningful although modest benefit compared to their overall income.
💡 What It Doesn’t Change
It’s important to understand what no tax on tips does not do:
⚠️ Tips are still reported income: You still must report tip income — the deduction just reduces your taxable income.
💼 Payroll taxes still apply: Tips are still subject to Social Security and Medicare payroll taxes (FICA), and you may owe state income tax on tips depending on where you live.
📊 Beyond the Numbers — Policy and Debate
The “No Tax on Tips” provision has been a topic of debate:
📈 Proponents argue it helps lower-income and middle-income service workers by retaining more of their hard-earned money.
🧠 Critics say that because it’s temporary and limited — and because state and payroll taxes still apply — the benefit is smaller in practice than the slogan implies. Some also argue it isn’t the best way to support low-wage workers compared to wage reforms or earned income enhancements.
✨ In Summary
The “No Tax on Tips” law — part of the One Big Beautiful Bill Act — creates a federal income tax deduction for qualified tips, giving many service workers the chance to lower their taxable income by up to $25,000 per year through 2028. While this doesn’t eliminate all taxes on tips, it does represent one of the more talked-about tax changes in the 2025 legislative landscape.