No Tax on Tips: What tipped workers need to know now about reporting tip income

Tips and taxes have been part of the tax code for ages. Now, with the One Big Beautiful Bill going into effect, there are big changes in store for 2025 returns that affect just how much of your tips are taxed.

You probably have lots of questions about what this means for you—including what you should be doing now if you’re a tipped worker.

Here’s the good news: H&R Block has answers. And, at tax time, we’ll be right by your side so you can claim all the tax benefits you qualify for.

“No Tax on Tips” bill: Key changes

As part of the 2025 reconciliation bill, you may have heard about No Tax on Tips. This new rule allows certain workers to deduct up to $25,000 in tips from their income. Some of the details are still being finalized, but we’ll update our information as we learn more.

One big thing to note: While it’s referred to as “No Tax on Tips,” it doesn’t mean tips are entirely tax-free. In other words, the new rule provides a tax break, but not a complete exemption from taxes on tips. In this post, we’ll use this informal name, but you’ll want to keep the deduction limit in mind.

So, what does “no tax on tips” mean in a real-world setting?  It means eligible workers can deduct a portion of their tip income from federal income tax, but other taxes like Social Security and Medicare (called FICA tax) still apply.

Read on to find out how this new rule could impact you.

How much of my tips are tax free?

Under the new law, you can deduct up to $25,000 of tip income annually from your federal income taxes. When you file, you won’t have to pay income taxes on any qualified tips.

When will No Tax on Tips start?

No Tax on Tips goes into effect starting with the 2025 tax year. That means you can apply the deduction to qualified tips starting January 1, 2025.

Who qualifies for the No Tax on Tips deduction?

Not every person who receives tips will be able to take the deduction. To qualify, you must work in an occupation where tipping is customary.

So, which ones are those?  The exact answer is coming soon. The Treasury Department will release a list of eligible occupations within 90 days of the bill’s passage.

Aside from your occupation, you can claim this benefit whether you itemize or take the standard deduction.

What tips count for the deduction?

Tips received in cash, via credit card, debit card, and through tip-sharing arrangements all count toward the deduction.

Who doesn’t qualify for the No Tax on Tips deduction?

Even if you happen to be in one of the eligible occupations, there’s a chance you may not qualify if your income is on the higher end. The deduction begins to phase out if your income reaches $150,000 ($300,000 for joint filers).

Are there income limits for the No Tax on Tips deduction?

Yes, the deduction begins to phase out for individuals with a higher modified adjusted gross income. In other words, you may only get to take a portion of the deduction.  

Specifically, the deduction starts to phase out at:

• $150,000 for most filers
• $300,000 for joint filers

Additionally, self-employed individuals can only deduct up to their net income from tip-based work.

What about Medicare, Social Security and tips?

The deduction applies to your federal income taxes—but not Social Security and Medicare. So, even if you qualify for the deduction, your tip income is still subject to Social Security and Medicare taxes. You’ll see the amount reported for Social Security and Medicare on your W-2.

Will federal income tax withholding apply to my tips?

Federal income tax withholding will not apply to the portion of your tips that fall under the $25,000 deduction threshold. However, income tax withholding may still apply to tip income above that amount.

How will my tips be reported to the IRS? What do I need to do?

There are a couple of steps to accurately reporting your tips.

Report your tips to your employer

By the 10^th of each month, you’re required to report your total monthly tips from the prior month to your employer. Depending on where you work, they may have a process for reporting tips.  You can also use Form 4070 to report tip income.

Or you can create your own report that includes the following:

• Your name, address, and Social Security number
• Your employer’s name and address
• The month or period the report covers
• The total amount of tips you received during the period

Your employer reports your tip income to the IRS  

Your employer will report your tips to you and the IRS on your W-2 form as part of your gross income. Your employer is responsible for sending your W-2 by the end of January, either by mail or electronically.

Keep a daily log for accuracy

It’s a good idea to keep a personal tip log to ensure all your income is accurately reported and to help claim the deduction. This doesn’t have to be in a formal spreadsheet or on any type of form—a notebook could work. You could use the same type of documentation used for your monthly reporting.

You should keep your records up to date in real time instead of trying to remember at the end of the year.

No Tax on Tip FAQs

Are tips taxed? Were they always taxed?

Yes, tips are taxable income and have always been considered so. But before the new bill was passed, the taxability was handled differently.  The new law allows a deduction for a portion of tip income, but it doesn’t eliminate taxes entirely.

Did No Tax on Tips pass in Congress?

Yes, the No Tax on Tips provision was passed as part of the One Big Beautiful Bill and was signed into law on July 4, 2025.

When does No Tax on Tips go into effect? And when does it end?

The deduction starts with the 2025 tax year and continues through 2028.

Rely on H&R Block for help with claiming your tip deduction

While tax changes can be stressful, you don’t have to go it alone. Trust the expertise of H&R Block to help make sense of your taxes. Make an appointment to file with a tax pro or with H&R Block Online.