If you earn tips, the One Big Beautiful Bill Act might just put more money back in your pocket. Among its many tax-related provisions, the Act includes a groundbreaking exemption: for the first time, qualified tip income, up to a capped amount, can be excluded from federal taxable income. In this post, we’ll break down how this “no tax on tips” policy works, who qualifies, and what it means for tipped workers and the broader economy.
Whether you're a server, bartender, salon worker, or business owner in the hospitality space, here’s what you need to know.
What Is in the Big Beautiful Bill?
The One Big Beautiful Bill Act—often referred to as the Big Beautiful Bill—is a sweeping federal tax proposal designed to deliver direct financial relief to workers and families. It contains a series of high-profile deductions, including:
- A federal income tax exemption on qualified tip income
- A tax deduction for overtime premium pay
- Expanded standard deductions
- Incentives for childcare and eldercare
Each provision is intended to reduce taxable income, increase take-home pay, and support labor force participation. But few parts of the legislation have captured as much public attention as the provision that removes federal income tax on tips for qualifying workers.
Big Beautiful Bill Summary: No Tax on Tips
Under the One Big Beautiful Bill Act, workers who receive qualified tips can deduct up to $25,000 in tip income from their federal taxable income starting with the 2025 tax year. That means if you earn $20,000 in tips in a year, you could potentially owe zero federal income tax on those earnings.
Key Details:
| Category | Details |
|---|---|
| Provision Name | No Tax on Tips |
| Bill | One Big Beautiful Bill Act |
| Effective Tax Year | 2025 |
| Expiration | End of 2028 tax year |
| Deduction Limit | Up to $25,000 per individual |
| Eligible Income | Voluntary tips (cash, credit card, pooled tips) |
| Excluded Income | Service charges, commissions, regular wages |
Under current tax law, you’d pay income tax on the full $45,000. Under the Big Beautiful Bill, you could deduct the entire $20,000 in tips, reducing your taxable income to just $25,000. That could mean thousands in tax savings depending on your tax bracket. The deduction applies in addition to the standard deduction, so it reduces your adjusted gross income (AGI), not just your taxable income. This can also increase your eligibility for other tax credits and reduce phaseouts based on AGI. What Occupations Qualify for the Tip Exemption?One challenge of the bill is its definition of “qualified occupations.” The law directs the U.S. Treasury to publish a list of eligible job categories by October 2, 2025. While that list has yet to be released, it’s expected to include:
To qualify, tip income must be voluntarily given and properly reported. That means workers must maintain accurate records of tips received and ensure that employers include those tips on year-end Forms W-2 or 1099. How Businesses Are AffectedEmployers are not exempt from responsibility under the new rules. Businesses will need to:
The IRS is expected to issue detailed guidance on reporting requirements and recordkeeping standards prior to the 2025 filing season. Businesses in hospitality, food service, personal care, and travel industries may also need to update payroll software and educate employees on how the tax benefit works. Why the Big Beautiful Bill Targets TipsTipped workers often fall through the cracks of economic policy. Although tips are legally taxable income, enforcement and compliance have historically been inconsistent. Many low-wage workers rely on tips to bridge the gap between minimum wage and a livable income. By exempting tips from federal income tax:
Will State Taxes Still Apply to Tips?Most states that levy income tax use federal AGI as a starting point. However, because this is a federal deduction, each state will decide whether to conform to or decouple from this part of the tax code. As of now, it’s unclear whether states will honor the tip deduction, meaning some workers could still owe state income tax on tips even if they are exempt federally. States with large service economies, like Nevada, Florida, and California, may face pressure to follow suit, but others may resist the change due to potential revenue losses. What Tipped Workers Should Do NowIf you're a tipped worker or manage employees who receive tips, here’s how to prepare for the changes:
Final Thoughts: What This Means for Workers and PolicyThe One Big Beautiful Bill Act boldly reimagines how tax relief can be delivered directly to individuals. Its no-tax-on-tips provision may seem small in the grand scheme of federal tax reform, but for millions of workers in restaurants, salons, hotels, and delivery services, it represents a meaningful shift in how labor is valued. By recognizing the real-world structure of tipped income, the bill addresses a long-overlooked segment of the workforce. However, it also opens the door to complex tradeoffs, including revenue loss, uneven tax benefits, and ongoing debates about wage fairness. Workers and businesses must adapt as we approach the 2026 tax year; recordkeeping, reporting, and filing will become more critical than ever. But for those who rely on tips to make ends meet, the Big Beautiful Bill could make the biggest impact where it’s most needed: the bottom line. How can Taxfyle help?Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own. At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you. Legal DisclaimerTickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.          Was this post helpful?Thank you for your feedback Oops! Something went wrong while submitting the form.         |
