Tipped income can be confusing even under normal circumstances—and now, with a major tax change on the books, there’s more to unpack. Here’s what you need to know about tipped wages, how they’re taxed, and how the new law will shake things up starting in 2025.
The House and Senate narrowly passed “The One, Big, Beautiful Bill,” which Trump signed into law on July 4, 2025, making the no tax on tips a reality. The law includes a no tax on overtime rule, increase the standard deduction, increase the child tax credit, and no tax on tips for tipped employees in certain industries.
If you employ workers who regularly receive tips, the no tax on tips policy would directly impact your employees on payroll. Here’s what to know.
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Overview of tipped income and taxation
Some employees (e.g., restaurant servers, nail technicians, etc.) regularly and customarily receive tips as part of their compensation. If an employee regularly receives more than $30 in tips per month, they are officially a tipped employee under the Fair Labor Standards Act (FLSA).
Customers typically leave cash tips or electronic tip payments (e.g., via credit and debit card), or employees can receive tips from a tip pooling agreement. According to the IRS, these are all considered “cash tips.”
Employers must pay tipped employees at least the tipped minimum wage, which varies by state. The tipped minimum wage is a lower hourly rate than the regular minimum wage.
How do taxes on tips work? Employees must report all tips to their employers if they receive $20 or more tips during a month. All reported tips are subject to federal income, Social Security, and Medicare taxes (plus state and local taxes, where applicable).
As the employer, you must withhold taxes from the employee’s tipped income, remit it to the proper agencies, and report the income and taxes on Form 941 and the W-2 form for employees.
What are the “no tax on tips” changes?
Starting in 2025 and going through 2028, cash tips that an individual receives in an occupation that traditionally and customarily receives tips would qualify for a federal income tax deduction for the total tipped income received.
What’s considered cash tips? The IRS defines “cash tips” as:
- Tips left in cash
- Tips paid by credit or debit card
- Tips distributed through a tip pool or tip-sharing agreement
What type of occupations qualify for the tip tax deduction? The following tipped services are examples that would qualify for the tax deduction:
- Providing, delivering, or serving food or beverages for consumption
- Barbering and hair care
- Nail care
- Esthetics
- Body and spa treatments
Be on the lookout for the Secretary of Treasury to release an official list for those jobs that qualify for the tax deduction.
| Several states are also noodling a no tax on tips and overtime law. |
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| Several states (e.g., Alabama, North Carolina, and New Jersey) have also proposed legislation to eliminate state income tax on tips and overtime pay. |
What tipped employees don’t qualify under the new tax deduction? The Fair Labor Standards Act definition of a tipped employee –anyone who regularly earns more than $30 per month in tips– is used to determine whether an employer can pay an employee the lower tipped minimum wage.
However, the “no tax on tips deduction” in “The One, Big, Beautiful, Bill” uses a much narrower definition of who qualifies. So, even if someone meets the FLSA standard for being a tipped employee, they may not qualify for the federal tip deduction.
Employees who don’t qualify for the “no tax on tips” deduction:
- High earners: This is defined as making over $160,000 per year. This cap applies regardless of how much tip income is earned.
- Jobs where tipping isn’t customary: Examples of non-qualifying jobs are, hotel front desk or concierges, retail workers, gig workers. This will be defined by the Secretary of State in coming months.
- Employees who don’t report tips to their employer.
- Nonresident aliens: Typically foreign nationals who don’t meet the substantial presence or green card test.
How should employers handle the “no tax on tips” in payroll?
If your an employer doing payroll for tipped employees, you will continue withholding, remitting, and reporting taxes on tips as normal in payroll and at the end of the year.
Why?
The tip tax deduction does not reduce taxable income at the time the tip is earned. Instead, employees must wait until they file their federal tax return to claim the deduction for their reported tip income.
However, because of the possible tax deduction tipped employees will have, employers should anticipate they might adjust their W-4 form to lower their tax withholding throughout the year, prompting you to update your payroll.
FAQs
Yes, tips are still being taxed in 2025. However, the One Big Beautiful Bill Act (signed on July 4, 2025) provides a tax deduction for cash tips earned by qualifying tipped employees. This deduction will be applied when tipped employees file their yearly income taxes.
Not quite. Although qualifying tipped employees would be able to claim a tax deduction equal to the amount of cash tips received, tips are still subject to Social Security, Medicare, state and local payroll taxes.
State tax on tips may go away if states pass their own legislation.
According to the IRS, cash tips include tips received from customers, charged tips (e.g., credit and debit card charges), and tips under a tip-sharing arrangement.
Employees must report all tips to their employers if they make $20 or more in tips.
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This article has been updated from its original publication date to reflect changes the new law brings.
This is not intended as legal advice; for more information, please click here.
