:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2222568277-54c400f9bc584f3684d0640039504dd2.jpg)
Key Takeaways
- The “One Big, Beautiful Bill” created new tax deductions for income earned as tips.
- Fewer than 3% of all tax filings will be able to utilize the new deduction and tips will still be subject to payroll taxes.
- However, eligible people can subtract tips from their taxable income and, on average, save almost $1,400 on income taxes.
While the new “no tax on tips” provision sounds simple enough, some caveats and eligibility requirements restrict the new tax deduction.
The new tip provision is one of several new deductions resulting from the “One Big, Beautiful Bill” that apply to the 2025 tax year. According to estimates by the Tax Policy Center, the tip deduction will benefit about 2.6% of all tax units. A tax unit essentially refers to one tax return, which could be filed by single taxpayers, taxpayers who file jointly, taxpayers with dependents, or others.
The deduction only applies to those who earn tips and excludes tipped workers who are married but file separately, as well as those who do not provide a Social Security number on their tax return.
It also phases out for higher-income tax units, starting at $150,000 for single taxpayers and $300,000 for married taxpayers filing jointly. That means single taxpayers who make more than $400,000 and joint filers who make more than $550,000 will be ineligible for the tip deduction, as calculated by the Tax Policy Center.
Tips Still Subject to State, Local, and Payroll Taxes
Although the provision is called “no tax on tips,” that is not exactly accurate. Tips will still be subject to state and local taxes and payroll taxes, which include paying toward Social Security, Medicare, and FICA.
However, when eligible tax units file their 2025 tax returns next year, they will be able to deduct their tips to lower the amount of federal income taxes they owe. That essentially means they can subtract the number of tips they received from their total taxable income, lowering how much they will have to pay.
Employees can deduct up to $25,000 of their qualified tips annually, and self-employed individuals can deduct up to their yearly net income from the business for which the tips were earned.
On average, eligible tax units with workers who receive tips, such as waiters and hairstylists, will save about $1,370 on their taxes by using this deduction, according to the Tax Policy Center.