Written by Landon Martin
The One Big Beautiful Bill Act (OBBBA) passed earlier this year, introduced significant changes to the tax landscape, impacting businesses and individuals alike. Understanding these provisions is essential for compliance and strategic planning. This article focuses on the no tax on tips section of the OBBBA, breaking down its implications and offering practical guidance to help you to stay informed and prepared.
Section 70201 of the OBBBA addresses no tax on tips (Source: H.R.1-OBBBA). The goal of this section is to deliver on presidential priorities to provide new middle-class tax relief (Source: H.R.1-OBBBA). In simple terms, this provision allows a new deduction effective for the 2025-2028 tax years that allows employees and self-employed individuals to deduct qualified tips received in occupations that are listed by the IRS as “customarily and regularly receiving tips” (Source: FS-2025-03). For purposes of this deduction, regulations group the occupations into the following eight categories with an assigned Treasury Tipped Occupation Code (Source: IR-2025-92):
- 100s – Beverage and Food Service
- 200s – Entertainment and Events
- 300s – Hospitality and Guest Services
- 400s – Home Services
- 500s – Personal Services
- 600s – Personal Appearance and Wellness
- 700s – Recreation and Instruction
- 800s – Transportation and Delivery
For a complete listing of qualifying occupations and their Treasury Tipped Occupation Codes as identified by the treasury, refer to the U.S. Department of the Treasury’s website listed in the references at the end of this article. (Source: Occupations That Customarily and Regularly Received Tips on or Before December 31, 2024).
For the purposes of this provision, qualified tips include the amounts paid voluntarily in cash or charged tips received from customers or amounts received from tip sharing and exclude any mandatory charges added to a customer’s bill (Source: IR-2025-92).
The qualified tip deduction allows certain taxpayers to reduce their taxable income by reporting eligible tips separately. The provision has different implications depending on your status as an employee, self-employed, or employer. Understanding these distinctions is critical for compliance and accurate reporting:
- Employee: You may deduct up to $25,000 in qualified tips on your tax return for the applicable tax years (Source: FS-2025-03).
- Self-Employed: You may deduct up to $25,000 in qualified tips on your tax return for the applicable tax years; however, the amount you are allowed to deduct cannot exceed your business’s net income in the year in which the tips were earned (Source: FS-2025-03).
- Employer: You must file information returns with the IRS in the case of Form W-2 and provide statements to employees showing cash tips received during the year (Source: IR-2025-110). If you have not already, communicate these rules to your employees and specify what is included as qualified tips.
For high-income individuals, this deduction will phase out if your AGI is over $150,000 ($300,000 for joint filers) by a $100 decrease of the deduction for every $1,000 over the threshold (Source: Federal Register). This means that if your AGI is over $400,000 ($550,000 for joint filers), you will not be eligible for the deduction.
By understanding the basics, you can better anticipate how this change fits into your overall tax strategy. Staying informed about OBBBA provisions is critical to protecting your interests and seizing opportunities. Thank you for trusting our firm as your resource for clarity and compliance. If you have any questions or need assistance, please reach out.
References
- (Source: FS-2025-03) https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors
- (Source: IR-2025-110) https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill
- (Source: IR-2025-92) https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill
- (Source: H.R.1-OBBBA) https://www.congress.gov/bill/119th-congress/house-bill/1/text
- (Source: Occupations That Customarily and Regularly Received Tips on or Before December 31, 2024) https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf
- (Source: Federal Register) https://www.federalregister.gov/documents/2025/09/22/2025-18278/occupations-that-customarily-and-regularly-received-tips-definition-of-qualified-tips