For millions of workers, tips aren’t just a perk — they’re essential. Data show that about 4 million people in the United States, or one out of every forty workers, depend on tips to pay the rent and put food on the table.
However, the IRS usually taxes that money. If tips are part of your pay, the federal tax agency treats every dollar you receive, whether left on the table in cash or added to a credit card receipt, as regular income.
But that has now changed for many workers, following President Trump's signing of the so-called "One Big Beautiful Bill" (OBBB) on July 4, 2025.
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The OBBB incorporates a bill known as the “No Tax on Tips Act,” which had previously passed the U.S. Senate in a surprising 100-0 bipartisan vote. Republican lawmakers included the measure in their mega reconciliation bill, which is now law.
This means millions of tipped workers might temporarily keep more of what they earn, at least when it comes to some of their cash tips, starting with income earned this year, in 2025.
Here’s more of what you need to know.
Are tips being taxed in 2025?
By law, you have to report all your tips to your employer if they total $20 or more in a single month. Your employer includes those tips in your paycheck calculations, withholding federal income tax, Social Security tax, and Medicare taxes, just like they do for your hourly wages.
When you file your tax return, your reported tips are included on your W-2 and added to your other income to determine how much you owe. Even if you get paid in literal cash, the IRS expects you to keep a record and report it.
So, tips haven't historically been treated any differently than your regular paycheck when it comes to taxes.
But with the OBBB now signed, starting with the 2025 tax year (returns you normally file in early 2026), eligible workers can deduct up to $25,000 in reported tip income from their federal income tax.
However, the deduction phases out for those earning over $150,000 ($300,000 for joint filers) and is scheduled to expire after 2028.
No Tax on Tips Act unanimously passed the Senate
So, how did we get here? Well, the No Tax on Tips Act was a bipartisan bill sponsored by Republican Sen.Ted Cruz of Texas. It passed the Senate by unanimous consent on May 20.
The measure, which the Peterson Foundation estimated could cost $110 billion over ten years, had roots in Donald Trump’s 2024 presidential campaign.
You may remember that Trump frequently promised to end federal taxes on tips and overtime pay.
But Republicans weren't the only ones who called for ending taxes on tip income.
- Sen. Jacky Rosen (D-Nev.) has long pushed to make tips tax-free.
- Tip taxes are a significant issue in Nevada, as the state’s economy is largely driven by its hospitality and service industries.
- More than 5% of all Nevada workers rely on tips as a key part of their income. That’s the highest percentage of tipped workers in any state, according to the Tax Policy Center.
“[The No Tax on Tips Act] will provide immediate financial assistance to numerous hardworking families,” Rosen stated in a release regarding the initial bipartisan effort.
Meanwhile, in a statement, Sen. Cruz called the measure “a lasting impact on millions of Americans by protecting the hard-earned dollars of blue-collar workers.”
So, what is the OBBBA when it comes to tip income? Here’s a quick summary.
A Deduction for Cash Tips: Workers in qualifying tipped occupations can now deduct up to $25,000 of those tips from their taxable income for tax years 2025 through 2028.
Who’s Eligible? The deduction is available for specified workers making up to $150,000 a year ($300,000 for joint filers). The income limit will be adjusted for inflation.
Which Jobs Qualify: The OBBB will target jobs where tipping is customary — think servers, bartenders, hair stylists, and nail techs. Though the U.S. Treasury Department and IRS will have to specify in later guidance which specific jobs will be eligible.
Employer Benefit: The new law also expands a tax credit for certain businesses, letting them claim credits for payroll taxes paid on tips like restaurants do.
Note: Now that the No Tax on Tips measure has been signed into law, the new tax deduction for cash tips takes effect for the 2025 tax year. That means eligible workers could claim the deduction when they file their taxes in early 2026 for income earned in 2025.
What the No Tax on Tips bill doesn't do
Despite the excitement over this change, there are some things the OBBB doesn’t cover.
The bill only applies to cash tips. However, for IRS tax purposes, literal cash tips, credit card tips, and tips made through electronic payment methods like apps are traditionally treated the same. Non-cash tips are still considered taxable by the IRS but are not covered under this bill.
- Also, there’s no payroll tax break involved. That means you will still pay Social Security and Medicare taxes on your tips, even if you claim the income tax deduction.
- And…not everyone will benefit. About a third of tipped workers reportedly make so little they don’t owe federal income tax.
- Other workers, like cooks, dishwashers, or other behind-the-scenes staff who don’t usually receive tips, won’t receive a tax break under this bill either.
Note: The Treasury Secretary and IRS are responsible under the OBBB for deciding which workers can use the new tip income tax break. They reportedly have 90 days from when the law is signed to publish a list of "customarily tipped" occupations, based on jobs where people usually receive tips at the end of 2023.
What about Trump’s 'One Big Beautiful Bill'?
The GOP's “One Big, Beautiful Bill” was signed into law by President Trump on July 4, 2025. Here are key points to keep in mind:
- The "no tax on tips" provision is structured as a temporary deduction (2025-2028), not a full exclusion of tips from taxable income.
- So, workers would still report their tips and claim the deduction when filing their taxes, rather than having tips automatically excluded from taxable income.
- Income and deduction amount limits apply, as mentioned above.
- Only workers in specified jobs will be eligible for the tax break.
Was no tax on overtime approved?
The proposal to eliminate federal income tax on overtime pay, which was also a Trump campaign pledge, was a separate measure.
And yes, the OBBB also introduces a temporary deduction for overtime pay.
The legislation offers eligible single filers a deduction up to $12,5000 and $25,000 for married couples filing jointly, for tax years 2025 through 2028.
The overtime pay tax deduction phases out for earnings over $15,000 (single) and $300,000 (joint filers).
For more information, see What's Happening With Taxes on Overtime Pay?
Tax on tips: What this means for you
If you work a job where you receive cash tips, the Senate’s bill, if approved by the House and the President, could eventually mean more money in your pocket.
However, for those who already don’t earn enough to owe income tax, this new bill won’t have an impact.
Still, extra cash is welcome for many in the service industry. As the OBBBA is implemented by the IRS, supporters say many tipped workers will see more take-home pay.
But as always, consult a tax professional or financial planner to understand how these changes might impact your tax situation.
This article has been updated to reflect the passage of the reconciliation legislation known as the One Big Beautiful Bill.
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