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.
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Kevin says
Thanks for another great blog, Harry!
Is there a way to subscribe to follow-up comments without leaving a comment?
Barry Northrop says
Thanks, Harry, for covering the nuts-and-bolts of the real-world application of these recent tax law changes…and for cataloging them on your OBBBA Series page (https://thefinancebuff.com/tag/OBBBA).
Dan K says
“Performing arts” as an excluded occupation group was probably very intentionally added to target groups of people from benefiting from this legislation. People in those occupations tend very often to be liberal. A more specific target may be drag performers. From what I’ve seen, their compensation is almost exclusively tips.
ProNewerDeal says
Can a DeliveryGig/UberEats contractor/GigWorker vouluntarily NOT claim the UberEats tips as a deduction?
There is an interesting pdf doc from Gridwise Analytics “Annual Gig Mobility Report 2025”. In this doc, it has the aggregate Revenue/mile driven stat by DeliveryGig service, which it claims it aggregated from its users. A statistician would warn that this “sample” of Gridwise app users would have to representative of the entire population. For lack of any other data, I will accept this assumption that Gridwise users is representative of all UberEats users. UE in 2024 had a mean average of $0.96 revenue per mile driven.
Consider a simple example, that a UE contractor went on a “shift” where he only used UberEats (did not multi-app with say Instacart/Doordash/etc), made $100 revenue say over 14 deliveries. The aggregate “Fare” of these 14 deliveries was $60, and the aggregate tip from the 14 deliveries was $40. 100 miles were driven, which is a $1.00 revenue per mile driven stat, actually slightly better than the Gridwise/UE 2024 average $0.96/mile.
Under the pre-“no tax on tips”, in 2025 $0.70/mile is the mileage rate. Thus the taxable income for this shift is $30 = $100 revenue – (100 miles * $0.70/mile). Then the contractor would owe the 15.3% contractor/double FICA tax, the Fed income tax (12% or whichever), and the state income tax; as a portion of this $30. Let’s say the contractor’s Fed income tax was 12%, he will owe 12% of $30, or $3.60 for this shift.
If I understand correclty the article, the state tax & contractor/double FICA tax will be calculated exactly the same as before, do I understand correctly? The difference is the Fed income tax.
Now if only the Fare portion is subject to Fed income tax, this shift had $60 in taxable revenue, but $70 in mileage deduction. So there is NO Fed income tax owed.
Would it raise a “Flag” with the IRS if an UE contractor had NO Fed income tax owed for the year for their UE contractor work, since there would be no business profit for the UE contractor work? That seems likely for the majority of UE contractors, from the occassional 5 shifts/year workers to the few FT UE contractors. My sense is that the UE contractors would need a revenue per mile stat much above the 2024 $0.96 average to have ANY Federal income tax.
Would said UE contractors that have no Federal income tax for their UE contractor work have the option of “declining” the “no tax on tips” deduction, thereby maintaining the possibility of demonstrating a small “business profit” for their UE contractor work?
Harry Sit says
You’re making it more complicated than it is. $100 revenue – $70 business expenses = $30 business profit. You pay “double FICA” on this $30. $30 is added to your AGI, which will be the starting point for state income tax in most states. So far it’s exactly the same as before. The business is already demonstrated as profitable. The only thing new is, after all these are said and done, you take a deduction for tips. You received $40 but it’s higher than the $30 business profit. So you deduct $30. It’s similar to the example of a sole proprietor hairdresser mentioned in the post.