No Tax on Tips in 2025 Trump Tax Law. What’s the Catch?

The 2025 Trump tax law — One Big Beautiful Bill Act (OBBBA) — includes provisions for “No Tax on Tips” and “No Tax on Overtime.” It says if you earn tips, you won’t pay tax on those tips.

As you can expect, not everyone is eligible, and not all tips will have no tax. “No tax” covers only one type of tax, not all taxes. What’s the catch? Let’s take a deep dive.

Occupation

First of all, you must be in “an occupation which customarily and regularly received tips on or before December 31, 2024.” Don’t think you can run to your boss or your clients and have a part of your pay classified as tips if you’re not in those occupations.

Certain lines of business are automatically excluded. These include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. You don’t qualify whether you work as an owner or an employee and receive tips in these businesses.

“Performing arts” stands out in this list. The others in the list typically don’t get tips. Does that mean a band or a singer won’t qualify if they receive tips?

Voluntary Tips Only

A tip qualifies only if it “is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor.” I guess this means that a mandatory 20% service fee for a group of six or more won’t count.

The tips can be either cash or card charges. Shared tips count too.

Properly Reported

If you’re in the right occupation, it doesn’t matter whether you’re a W-2 employee or you’re paid by a 1099. Restaurant and hotel employees paid by a W-2 qualify. Uber and DoorDash drivers paid by a 1099 qualify as well.

The tips must be reported to you and the IRS on the W-2 or 1099. Or you can file Form 4137 with your tax return to report tips in addition to the amount on those W-2 or 1099 forms.

Currently, the W-2 form only has a box for allocated tips. Unallocated tips are mixed with regular pay in other boxes on the W-2. 1099-NEC and 1099-K forms don’t have a separate field for tips right now. The IRS will have to amend those forms with a place to break out tips. Until then, your employer or payor can report the tips to you separately outside the W-2 or 1099.

Temporary Window

As is the case with several other provisions in the 2025 Trump tax law affecting individual taxpayers, “No Tax on Tips” is only effective between 2025 and 2028 (inclusive). It expires at the end of 2028.

Tax Withholding

This provision only affects your federal income tax. It doesn’t change the Social Security and Medicare taxes withheld from your paychecks. If you’re paid by a 1099, it doesn’t reduce the self-employment tax you must pay in addition to the regular income tax. It doesn’t reduce your state taxes.

The IRS will make changes to payroll tax withholding to treat tips differently, but the changes won’t start until 2026. You won’t see any change in your paychecks in 2025 unless you change your tax withholding with your employer.

Tax Deduction

You will have a new tax deduction for your income from tips when you file your tax return. You’ll get a higher tax refund if the tax withholding was too high.

This deduction is available whether you take the standard deduction or itemize your deductions. However, it doesn’t lower your AGI. Your income from tips is still included in your AGI. It doesn’t make it easier for you to qualify for other tax benefits, such as the Child Tax Credit.

Dollar Cap

You may not be able to deduct all your tips. There’s a $25,000 cap. This cap is the same whether your tax filing status is single, head of household, or married filing jointly.

I guess Congress thinks that a married couple has at most one person earning tips. Therefore, the dollar cap is the same for a single person and a married couple. If you’re married, and both of you earn tips, the dollar cap for your combined tips is the same as that for a single person.

Filing separate returns doesn’t help, because you aren’t allowed this tax deduction if you’re married filing separately.

If you earn tips in a self-employed business (for instance, a sole proprietor hairdresser) and you deduct business expenses, the dollar cap is also limited by the net profit after all business expenses. If you received $20,000 in tips but the business only made $15,000 in net profit, you can only deduct $15,000.

Income Phaseout

The $25,000 cap goes down slowly as your income increases above $150,000 ($300,000 for married filing jointly). It decreases by $100 for every $1,000 of income above the threshold. The cap drops to zero when your income gets to $400,000 ($550,000 for married filing jointly).

Most people receiving tips don’t have an income that high and won’t be affected by the income phaseout.

Both Tips and Overtime

“No Tax on Tips” and “No Tax on Overtime” are independent of each other. You qualify for both if you receive both tips and overtime pay (or one person in a married couple earns tips and the other gets overtime). If you’re 65 or older, you also qualify for the Senior Deduction.

Calculator

I made a calculator to help you estimate your federal income tax before and after “No Tax on Tips” and “No Tax on Overtime.” Use the calculator to see how much you’ll benefit. Leave the overtime fields at 0 if you don’t have any overtime.

If you’re married filing jointly, please include income and tips from both of you.

The calculator estimates taxes using basic assumptions. It doesn’t include the self-employment tax if you’re paid by a 1099. Your taxes may be different if you have a more complex scenario.

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You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.