OBBBA: "No Tax on Tips" — What Actually Changes

What counts as a tip

Included: cash or charged amounts that are:

• Received directly from customers or through a valid tip-sharing arrangement
• Voluntary, with no consequence if not paid
• Determined by the customer, not negotiated

Not included: employer-mandated service charges or automatic gratuities such as large-party fees, bottle service fees, room service charges, contracted luggage fees, or mandatory delivery charges. These are wages or fees, not tips.

How the deduction works

• Annual cap: up to $25,000 per taxpayer
• Self-employed limit: deduction cannot exceed net income from the business that earned the tips, computed before the tips deduction
• Income phaseout: begins at MAGI $150,000 single ($300,000 joint) and phases out by $400,000 single ($550,000 joint)
• Tax affected: federal income tax only; Social Security and Medicare taxes are unchanged
• Location on return: below-the-line deduction; available whether or not the taxpayer itemizes

Example:
Mario, a Manhattan server, earns $31,680 in wages and $60,000 in tips in 2025. Mario deducts $25,000 of tips. At a 22 percent marginal rate, that saves $5,500 of federal income tax. Payroll taxes stay the same.

Coordination with other deductions

QBI interaction: any tips deducted here cannot also count toward the QBI (Section 199A) deduction. For example, if a self-employed stylist deducts $20,000 of tips under OBBBA, that $20,000 does not feed into QBI.

Practical guardrails and planning notes

• This is a temporary benefit for 2025 through 2028; do not build long-term compensation models around it
• Payroll taxes do not change; expect no savings on Social Security or Medicare
• Only about 2.5 percent of U.S. workers are in tip-reliant occupations
• Recordkeeping drives eligibility; report tips accurately, track tip pool policies, and keep daily logs
• Married taxpayers must file jointly to claim the deduction

Quick compliance checklist (2025 filing season)

• Validate the worker occupation appears on the IRS customarily tipped list
• Confirm SSN eligibility and joint filing status if married
• Ensure tips were reported to the employer (employees) or logged contemporaneously (self-employed)
• Apply the $25,000 cap and MAGI phaseout rules
• Exclude OBBBA-deducted tips from QBI
• Treat service charges as non-tip wages or fees
• Withhold and deposit payroll taxes normally

Bottom line

OBBBA no tax on tips is branding, not a blanket exemption. Qualified workers may deduct up to $25,000 of eligible tips from income tax for 2025 through 2028, subject to phaseouts and strict definitions. Payroll taxes remain unchanged. Documentation matters.

Disclaimer: This summary is for general guidance only and is not tax, legal, or accounting advice. Implementation details may evolve with IRS guidance; confirm current forms, thresholds, and definitions at filing time.

Closing note:

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