No Tax on Tips: Federal Deduction for Qualified
Tip Income
The “No Tax on Tips” deduction was created under HR1 (One Big Beautiful Bill) in 2025. It allows workers in tip-based occupations to reduce their year-end federal income tax liability by up to $25,000 per individual when filing taxes for tax years 2025–2028.
Continue Withholding Income Tax
Employers must continue to withhold and remit federal income tax on all employee wages, including tips. Updated versions of Forms W-2 and 1099-NEC will include new fields for reporting qualified tip income, enabling workers to claim this deduction.
Key Details of the Tip Deduction
- Above-the-line federal income tax deduction
- Available to employees in tip-earning roles
- Employers must continue withholding payroll taxes on tip income
- Deduction capped at $25,000 per individual
- Phases out starting at $150,000 AGI ($300,000 for joint filers)
- Effective for tax years 2025–2028
What Tax Is Deductible from Tips?
- Deduction applies only to federal income tax (FIT) withheld on qualified tip income.
- Not applicable to Social Security, Medicare, or state/local taxes.
- Employers must track and report FIT withheld from tip income separately on Forms W-2 and applicable Forms 1099.
- Year-end forms for tax years 2025–2028 will include new codes and fields to report this information.
Who Qualifies for the Deduction?
- Workers in tip-based occupations (e.g., servers, bartenders, salon technicians).
- Deduction can be claimed even if the taxpayer uses the standard deduction.
- Applies only to tip income reported to the employer and shown on Form W-2 (or Form 1099-NEC/1099-K for contractors).
- Phases out: reduced by $100 for every $1,000 of AGI above $150,000 ($300,000 joint filers).
- Taxpayer must have a valid Social Security number.
- A full list of qualifying occupations will be released by the Treasury Secretary.
What Counts as Tip Income?
- Tips must be voluntary payments determined by the customer.
- Includes cash tips, card tips, and pooled/shared tips.
- Does not include automatic gratuities (e.g., large-party service charges).
What Employers Need to Do
- Report all qualified tip income to the IRS, including amounts received retroactive to January 1, 2025.
- For 2025, employers may use a “reasonable method” (to be defined by the Treasury Secretary) to approximate tip amounts.
- Use Beyond’s designated “Tips” pay item to ensure accurate tracking and reporting.
Looking Ahead
Beyond will provide updated guidance once the Treasury Secretary finalizes the rules for approximating 2025 tip income and outlines the reporting process for tax years 2026–2028.
Related: No Tax on Overtime
HR1 also introduced a similar deduction for overtime pay. Non-exempt employees who work more than 40 hours in a week can reduce their year-end federal income tax liability by up to $12,500 for single filers or $25,000 for joint filers when filing taxes for tax years 2025–2028.
Need Help?
If you still have any questions, please don’t hesitate to reach out. Our team will be happy to provide answers and assist you in any way we can.