No Tax on Tips – One of the items in the One Big Beautiful Bill (OBBB) that excites many middle-class Americans. It is the section, lawmakers like Mike Johnson highlight this provision. So, I decided to take a look at the details. Here is what I learned.
What is it
Section 70201 of the OBBB amends the Internal Revenue Code of 1986 by adding SEC. 224. Qualified Tips. The purpose of the new section is to remove some taxes on tips for individuals in certain occupations. These occupations will be determined and published by the Secretary of the IRS by October 2025.
This new section defines qualified tips as cash tips which can be collected in cash or credit charges.
How It Works
All taxes continue to be deducted from the employee’s paycheck throughout the year. Nothing changes with how taxes are deducted. When the employee completes his/her taxes, they can deduct a portion of their tips from their income. Here are the constraints.
- A SSN is needed to receive the deduction.
- The deduction is equal to the total amount of tips up to $25,000.
- The deduction cannot exceed the employees modified adjusted gross income (MAGI).
- If the MAGI of the employee exceeds $150,000 ($300,000 jointly), the deduction amount is reduced by $100 for each $1000 over the $150,000 mark.
- Deduction is for federal taxes only. SSI, unemployment, and state taxes are not included.
doing the math
So what does that all mean? Individuals can deduct the amount of cash tips they earned up to $25,000. Their tax rate then applies to determine the amount of refund they will receive on those taxed tips. The table below shows the current tax rates and the maximum refund they could receive for that rate.
| Tax Rate | Taxable Income | Maximum Refund |
| 10% | up to $11,600 | $2,500 |
| 12% | up to $47,150 | $3,000 |
| 22% | up to $100,525 | $5,500 |
| 24% | up to $150,000 | $6,000 |
| 24% | up to $191,950 | $6,000 minus $100 for each $1,000 over $150,000 |
Let’s look at a couple of scenarios. Server tips are assumed to be 70% of their total pay and 35% for beauty technicians according to the U.S. Bureau of Labor Statistics (BLS) and IRS guidance.
Scenario 1: Single Individual making $18,600 waiting tables
- Total Income: $18,600
- Tip Income: $13,020
- Tax Deduction: $13,020
- Tax Rate: 12%
- Refund: $1,562.40
Scenario 2: Married Individual Making $31,940 Doing Nails
- Total Income with Spouse: $91,940
- Tip Income: $11,179
- Tax Deduction: $11,179
- Tax Rate: 22%
- Refund: $2,459.38
Scenario 3: Married Individual making $100,000 doing hair
- Total Income with Spouse: $325,000
- Tip Income: $35,000
- Tax Deduction: $22,500 ($2,500 removed for being over $300,000)
- Tax Rate: 24%
- Refund: $5,400
Dates that matter
2025
The first deductions can be made on 2025 taxes. Strict reporting requirements are currently not in place. Therefore, the IRS will provide guidance on how to approximate tips based on a “reasonable method.”
Between now and the end of 2025, businesses and software companies must build new functionality. This functionality should accurately account for cash tips and maintain the employees’ occupation.
2026 – 2028
Beginning in 2026, employers and systems must accurately manage cash tip totals and occupations. They must submit that information to the IRS to be used when completing tax returns in 2026 and subsequent years.
2029
No Tax on Tips is expired. Employees can no longer deduct any tip amounts from their taxes. A new law would need to be passed to extend this tax cut.
My analysis
Like so many other things, the devil is in the details. When No Tax on Tips is highlighted, not one politician talks about three very important things:
- Tips are still being taxed throughout the year and money is “returned” at the time taxes are done.
- The amount that can be deducted is capped.
- The tax code expires at the end of 2028.
It will be nice for employees to potentially receive some money back when they do their taxes. However, I think this misses the mark. People who depend on tips as the majority of their wages need to those dollars now and not when they do their taxes. Having the extra dollars throughout the year to help buy groceries and pay the rent/mortgage would be optimal.
It feels like lawmakers threw the middle class a bone here. They made the tax cuts for the richest Americans permanent. However, they wrote tax code for service workers that is capped. This tax code expires in three years. If they really were going to do this, why didn’t they make these permanent as well? Now, this code will have to go back to congress to extend beyond 2028 or make it permanent.
In summary, I think it is great that some individuals are going to get a little bit of money back for a few years. But, what they are doing for these individuals is paltry compared to what they did for the richest Americans.
Live My Truth 