Who can claim the deduction

For tax years 2025 through 2028, the tips deduction is available to:

• Employees in occupations that customarily and regularly received tips before 2025
• Self-employed individuals in those same occupations
• Provided they have a work-eligible Social Security number and, if married, file jointly

The IRS is publishing a qualifying occupations list. Examples likely to qualify include:

• Restaurants: servers, bartenders, hosts, food runners, counter staff; in some states, kitchen workers who participate in valid tip pools
• Hospitality: bellhops, valets, concierges, housekeeping, doormen
• Personal care: hairstylists, barbers, nail technicians, tattoo artists, body and spa workers, massage therapists
• Transportation: taxi and rideshare drivers; delivery drivers
• Other services: baristas, dog groomers, casino dealers, golf caddies, tour guides

Not eligible: Workers in SSTBs for QBI purposes and employees of SSTB employers, including health, law, accounting, performing arts, athletics, consulting, financial advisory, investment and wealth management, actuarial, and trading services. In short, professionals cannot convert fees to tips to claim an extra deduction.

What counts as a tip

Included: cash or charged amounts that are:

• Received directly from customers or through a valid tip-sharing arrangement
• Voluntary, with no consequence if not paid
• Determined by the customer, not negotiated

Not included: employer-mandated service charges or automatic gratuities such as large-party fees, bottle service fees, room service charges, contracted luggage fees, or mandatory delivery charges. These are wages or fees, not tips.

How the deduction works

• Annual cap: up to $25,000 per taxpayer
• Self-employed limit: deduction cannot exceed net income from the business that earned the tips, computed before the tips deduction
• Income phaseout: begins at MAGI $150,000 single, $300,000 joint and phases out by $400,000 single, $550,000 joint
• Tax affected: federal income tax only; Social Security and Medicare taxes are unchanged
• Location on return: below-the-line deduction; available whether or not the taxpayer itemizes

Example:

Mario, a Manhattan server, earns $31,680 in wages and $60,000 in tips in 2025. Mario deducts $25,000 of tips. At a 22 percent marginal rate, that saves $5,500 of federal income tax. Payroll taxes stay the same.

Coordination with other deductions

QBI interaction: any tips deducted here cannot also count toward the QBI Section 199A deduction. For example, if a self-employed stylist deducts $20,000 of tips under OBBBA, that $20,000 does not feed into QBI.

Practical guardrails and planning notes

• This is a temporary benefit for 2025 through 2028; do not build long-term compensation models around it
• Payroll taxes do not change; expect no savings on Social Security or Medicare
• Only about 2.5 percent of US workers are in tip-reliant occupations
• Record-keeping drives eligibility; report tips accurately, track tip pool policies, and keep daily logs
• Married taxpayers must file jointly to claim the deduction

Quick compliance checklist for 2025 filing season

• Validate the worker occupation appears on the IRS customarily tipped list
• Confirm SSN eligibility and joint filing status if married
• Ensure tips were reported to the employer for employees or logged contemporaneously for self-employed individuals
• Apply the $25,000 cap and MAGI phaseout rules
• Exclude OBBBA-deducted tips from QBI
• Treat service charges as non-tip wages or fees
• Withhold and deposit payroll taxes normally

Bottom line

OBBBA no tax on tips is branding, not a blanket exemption. Qualified workers may deduct up to $25,000 of eligible tips from income tax for 2025 through 2028, subject to phaseouts and strict definitions. Payroll taxes remain unchanged. Documentation matters.

Disclaimer: This summary is for general guidance only and is not tax, legal, or accounting advice. Implementation details may evolve with IRS guidance; confirm current forms, thresholds, and definitions at filing time.

Closing note:

We are here to keep your business sharp, your taxes optimized, and your future protected. If you would like to see whether this strategy fits your situation, reach out today at 855-922-WeDo (9336).

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