A new federal tax law may significantly reduce the amount of federal income tax paid by tipped workers. Known as the “No Tax on Tips” provision, this rule allows eligible taxpayers to deduct qualified tips starting with the 2025 tax year.

What Is the “No Tax on Tips” Rule?

This provision allows eligible workers to deduct qualified tips from federal taxable income. The deduction is available whether you itemize deductions or take the standard deduction.

What Tips Qualify?

• Cash tips or charged tips (credit/debit card)
• Tips must be voluntary and determined by the customer
• Tips cannot be negotiated or required in advance
• Tips must be earned in an occupation that customarily received tips before December 31, 2024

Not qualified:

• Automatic gratuities
• Mandatory service charges

Tips earned in a Specified Service Trade or Business (SSTB) do not qualify.

Deduction Limits & Income Rules

• Up to $25,000 per return
• Available to itemizers and non-itemizers
• Not available if filing Married Filing Separately
• Phase-out begins at $150,000 (Single/HOH) and $300,000 (MFJ)

Employer Reporting for 2025

Employers are not required to separately report qualified tips on Forms W-2 or 1099 for 2025. Employers may provide a separate statement, but it is optional.

Important: Taxpayers must keep their own tip records.

How to Prepare

• Track daily cash and card tips
• Save POS summaries and pay stubs
• Separate voluntary tips from automatic gratuities
• Work with a qualified tax professional

Final Thoughts

This new deduction may lower taxable income for many tipped workers, but documentation is essential. Preparing now can help avoid issues during filing season.

Source: IRS Notice 2025-69