←About the One Big Beautiful Bill
"No tax on tips" is a federal income tax deduction introduced in the One, Big, Beautiful Bill in 2025. The deduction allows tipped employees to reduce their year-end federal income tax liability (up to $25,000 per individual) when they file their taxes for tax years 2025–2028.
See how to enter OBBB qualified tips during a pay run→
Continue withholding income tax
Employers with employees who regularly earn tips are still required to withhold
and remit federal income tax on this income. Employees may claim tip income
when filing their taxes at the end of the year. Employers will need to provide
employees their total qualified tips, along with their Treasury Tipped Occupation
Code (TTOC).
Summary of this tax deduction
- Above-the-line federal income tax deduction
- Available for workers in tip-earning occupations
- Employers must continue to withhold payroll tax on tip income
- $25,000 max deduction per individual
- Income phase out begins at $150,000 ($300,000 for joint filers)
- Effective for tax years 2025 through 2028
What tax is deductible from tip income?
- Only federal income tax withheld on tip income can be deducted
- Other payroll tax withholdings, such as Social Security and Medicare, are not eligible for the deduction
- State and local taxes are not eligible for the deduction
Who qualifies for this deduction?
- Workers in occupations* that receive tips, like restaurant servers, bartenders, or salon technicians, may claim this deduction.
- This is an “above-the-line” deduction, meaning tipped workers may claim the deduction even if they take the standard deduction.
- The deduction is applicable only to tip income reported to the employer and reflected on the employee's Form W-2 (or the contractor’s Form 1099-NEC or Form 1099-K).
- The deduction begins to phase out at $150,000 of adjusted gross income ($300,000 for joint filers). For every $1,000 of income above the threshold, the deduction is reduced by $100.
- To claim the deduction, taxpayers must have a valid Social Security number.
*A full list of qualifying occupations is available at Treasury.gov→
What qualifies as tip income?
- "Tip income" is defined as earnings paid voluntarily, and in an amount determined by the payor, without negotiation.
- "Cash tips", as defined in HR1, also includes tips charged on a card, as well as "pooled" tips (received under a tip-sharing arrangement).
- Any gratuity or tip amount added automatically to a bill (a common practice for service workers of banquets or large dining parties) does not qualify for the tax deduction.
What employers need to do for the 2025 tax year
In order for tipped workers to be able to claim this deduction on their taxes, employers must provide employees with a report of all qualified tip income they received in 2025.
Because the Act applies retroactively to all tips earned in 2025, employers are allowed to “approximate” qualified cash tip amounts using a “reasonable method".
How to determine qualified tip pay for employees during tax year 2025:
Because the deduction employees can claim only applies to qualified tip income, you'll need to determine this amount for each eligible employee. While the bill refers to "cash tips", this includes tips voluntarily paid using a credit/debit card. It does not include any tips applied to a bill in a non-negotiable amount, such as an automatic gratuity added to a bill for a large dining party.
Only tips paid voluntarily can be claimed for the deduction.
To calculate the amount of tip pay employees may claim, you'll need to:
- Run an Employee Summary report
- Total the tips for each employee
- Subtract any tip amounts that do not qualify
- Provide each tipped employee with their total qualified tip pay
Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025→
Run an Employee Summary report
Go to Payroll Reports by clicking Payroll, then Reports, and select Employee Summary from the list.
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In the legacy menu, you'll find Employee Summary in the Reports tab.
Select or enter January 1st (01/01/2025) in the "First Check Date" field.
Select or enter December 31st (12/31/2025) in the "To Check Date" field.
Once you've selected the entire year as the range for your report, click Update LIst.
You'll find "Cash Tips" and "Controlled Tips" listed for each employee in the report (unless no tips were entered). You can write these totals down, or export this report as a spreadsheet to get started.
IMPORTANT: Not all tips can be deducted.
The "Cash Tips" and "Controlled Tips" pay items in this report represent tip amounts entered when processing payroll, and may include tip amounts that do not qualify for tax deduction. Tips paid involuntarily, such as automatic gratuity for food service workers serving large parties, do not qualify, and must be removed from employee totals.
Provide qualified cash tips and TTOC to each employee
Once you have tip totals for each employee (minus any automatic gratuities), you'll need to provide these totals to each employee, along with their Treasury Tipped Occupation Code (TTOC), in a written statement, by January 31.
Information about qualified tips→
Guidance for individuals who received tips or overtime during tax year 2025→
No tax on overtime
Do you have employees who earn overtime? OBBB also introduced a similar federal income tax deduction on overtime pay, which allows non-exempt workers who work over 40 hours in a week to reduce their year-end federal income tax liability (up to $12,500 for single filers, $25,000 if filing jointly) when they file their taxes for tax years 2025–2028.
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