The no-tax-on-tips provision under the One Big Beautiful Bill Act (P.L. 119-21) creates a federal income tax deduction on qualifying tip income, up to $25,000 per year for tax years 2025 through 2028. This is not a payroll tax exemption and FICA still applies to all tips. Enter your tip income, MAGI, and filing status to estimate the deduction.
Under the One Big Beautiful Bill Act (P.L. 119-21), tipped workers can claim an above-the-line deduction on qualifying cash and charged tips beginning in tax year 2025. The deduction reduces federal taxable income. It does not eliminate all taxes on tip earnings.
Key points:
For employers: your withholding and reporting obligations do not change. You must continue to collect employee-reported tips, withhold income tax and FICA, and report tips on Form 941. The deduction is claimed by the employee on their individual tax return, not through a payroll adjustment.
The deduction is capped and income-tested:
Annual cap: Up to $25,000 in qualifying tips per tax year. If you earn $30,000 in tips, only $25,000 qualifies for the deduction and the remaining $5,000 is taxed normally.
MAGI phase-out thresholds:
Above these thresholds the deduction is gradually reduced. For most tipped workers whose total income falls well below the phase-out levels, the full deduction applies. However, high-earning tipped professionals or those with significant non-tip income may see a partial or complete phase-out.
The calculator applies the $25,000 cap first, then checks your MAGI against the applicable threshold. Enter your estimated annual tip total and projected MAGI to see the net deduction. For tipped workers who also earn overtime, the no-tax-on-overtime calculator estimates that separate deduction.
The name "no tax on tips" is misleading if taken literally. This law provides a federal income tax deduction and does not exempt tips from payroll taxes. Every dollar of reported tips remains subject to:
Employers must continue to withhold employee FICA and income tax from tipped employees' wages and reported tips. The tip deduction is reconciled on the employee's annual Form 1040, not at the payroll level. If your paychecks look the same after the law passed, that is expected. The benefit appears when you file your return.
Not all income called "tips" qualifies for the deduction:
Qualifying tips:
What does not qualify:
For restaurant owners: Your employees may ask about this deduction. Your role is limited to accurate tip reporting and proper withholding. The deduction does not reduce your labor cost percentage or change your FLSA tip credit calculations. This provision is temporary, covering tax years 2025 through 2028. Confirm eligibility with a CPA or tax professional.
No. The OBBBA provides a federal income tax deduction on up to $25,000 in qualifying tips. FICA taxes, 6.2% Social Security and 1.45% Medicare, still apply to all reported tips. State income taxes may also apply depending on your state.
No. Continue reporting tips to your employer as you always have. The deduction is claimed on your individual tax return, not through a change in employer withholding or reporting. Unreported tips do not qualify for the deduction.
Yes, if you qualify for both. They are separate above-the-line deductions under the OBBBA. A tipped restaurant worker who earns overtime could claim up to $25,000 in tip deductions and up to $12,500 in overtime premium deductions, each subject to its own MAGI phase-out.
No. The provision is temporary under P.L. 119-21, covering tax years 2025 through 2028. Unless Congress passes new legislation, the deduction expires after the 2028 tax year.