Key takeaways

• Service workers can now deduct up to $25,000 in tips from federal income taxes.
• The deduction excludes payroll taxes and phases out for higher earners.
• Many tipped workers may see little benefit due to low incomes.
• The law signals growing support for flexible, modern income types.
   

New federal rules allow workers in tipped jobs to deduct up to $25,000 in cash tips from their federal income taxes, which may increase take-home pay.

A new federal law could change how millions of Americans are taxed on their earnings. The No Tax on Tips Act, which came into effect in July, is part of the broader One Big Beautiful Bill Act. The measure creates a temporary income tax deduction for workers who earn tips as a major part of their income. Under new rules, eligible taxpayers may exclude up to $25,000 in reported cash tips from their federal income taxes between 2025 and 2028.¹

The measure, which passed with bipartisan support in the Senate, aims to provide cost-of-living relief to workers in food service, hospitality, and personal care industries. The new provision permits cash tips earned within a calendar year to be deducted from a worker’s adjusted gross income (AGI), which could reduce the amount of pay that’s subject to federal income tax. Congress has instructed the Internal Revenue Service (IRS) to publish guidance on this new rule within 90 days of its passage, which coincide with a list of deduction-eligible occupations.² 

Who qualifies for No Tax on Tips

The new deduction is restricted to workers in roles where tipping is customary, as defined by the IRS.³ This includes jobs such as servers, bartenders, baristas, hairstylists, and delivery drivers, so long as they report tips to their employer. Taxpayers must have worked in an eligible tipped occupation for at least one day in 2024 to qualify for the deduction.⁴ 

There are other restrictions as well, such as an income cap. The full deduction applies to individuals earning up to $150,000 per year, or joint filers earning $300,000 per year.⁵ The deduction phases out above these thresholds and the $25,000 figure is per person, rather than per household.

The deduction only covers federal income taxes. It does not affect payroll taxes, such as Social Security and Medicare, which still use the total reported income for calculating what is owed.⁶ This includes tips. Workers still need to report all tips as usual, and employers will still withhold and submit payroll taxes to the federal government as they did before the new rule. Except now, eligible workers will be able to deduct their tipped salary from their AGI.

Who stands to gain from No Tax on Tips

Around 4 million people work in tipped occupations within the U.S., with a median weekly income of $538. This is about half the weekly earnings of non-tipped workers. Up to 37% of these workers already earn too little to owe federal income tax, according to recent research.⁷ Only 4% of taxpayers report tips to the IRS, mostly young, unmarried, and lower-income people. This may mean that many workers who are paid tips do not pay income tax to begin with, and may not see a meaningful change to their tax bill through the new deduction.⁸

There will still be beneficiaries, however, even though they may be concentrated in specific parts of eligible industries. Those with high tipping volume — think bartenders at high-end restaurants or casino workers — often report substantial income from tips, and are more likely to fall within the deduction’s eligibility range.⁹ Those on the lower end of the income spectrum, like restaurant servers and gig workers, may not earn enough to meaningfully benefit from the deduction.¹⁰ 

Where this leaves workers

The No Tax on Tips Act signifies a shift in how the tax code treats service work, offering recognition to industries that are often dependent on variable income. Even with broad support, there are still questions. Tipping culture does much of the heavy lifting in service economy jobs, which ebbs and flows depending on the business, location, and broader support for (or against) tips. This bill helps lower AGI for those who rely on tips for income, but stops short of strengthening financial safety nets for people in these lines of work.¹¹

Keep the change

The new deduction may also reflect a broader shift in how the tax code adapts to modern forms of worker income. For years, variable earnings (e.g., tips, gig work, seasonal bonuses) have been difficult to manage under systems designed for fixed wages. Recognizing tip income in this new way may help lay the groundwork for future efforts to help Americans report and retain more of what they earn. And for some, the new tax rules may be small change with the potential for big outcomes.