The No Tax on Tips Deduction: What It Means for 2025 and Who Qualifies

The "No Tax on Tips" promise became law through the One Big Beautiful Bill Act, and it took effect retroactively to January 1, 2025. If you or your employees work in a customarily tipped occupation, this new deduction can exclude up to $25,000 per year in qualifying tips from federal taxable income.

The IRS has designated 68 tipped occupations that qualify. And because they delayed enforcing the SSTB exclusion rule, eligibility is broader for 2025 and 2026 than Congress originally intended.

How the Deduction Works

Workers in customarily tipped occupations can deduct up to $25,000 annually in voluntarily paid cash tips from their taxable income during 2025 through 2028. The deduction phases out for workers with modified AGI over $150,000 ($300,000 for joint filers).

For employees, qualifying tips must be reported to the IRS — either through the employer on Form W-2 or by the employee on Form 4137.

For self-employed workers, tips must be reported on Form 1099-NEC or Form 1099-K. But here's the 2025 exception: payors and payment processors are not required to separately break out tips on any 1099 for 2025. Independent contractors can use their own records — earnings statements, receipts, POS reports, daily tip logs — to document qualifying tips.

The 2025 Transition Rules

Because the IRS hasn't revised Form W-2 to separately identify qualifying tips, employers don't have to provide a separate accounting for 2025. Employees can calculate their qualifying tips using any of these methods:

• Social Security tips in Box 7 of Form W-2
• Tip amounts reported to the employer on Form 4070 (or substitute)
• A voluntary separate accounting from the employer in Box 14 or a separate statement

Any unreported tips claimed on Form 4137, line 4, can be added to the total.

The SSTB Rule — Delayed

The statute says tips earned in the course of a "specified service trade or business" don't qualify. SSTBs include health care, law, accounting, performing arts, athletics, consulting, and financial services — the same list as the §199A qualified business income deduction.

For employees, the relevant business is the employer's — not the employee's own occupation. So a massage therapist at a hospital wouldn't qualify because the hospital is an SSTB. But the same therapist at a health spa would qualify, because spas aren't SSTBs.

Here's the good news: the IRS is not enforcing the SSTB rule for 2025 or 2026. They've determined additional guidance is needed and won't enforce it until they issue final regulations — which won't happen before sometime in 2026 at the earliest.

This means for 2025 and likely 2026, any worker in one of the 68 customarily tipped occupations can claim the deduction, regardless of whether their employer (or their own business, for independent contractors) is an SSTB.

Self-employed massage therapists, entertainers, musicians, and content creators are all SSTBs — but they can still claim the tips deduction for 2025 and 2026 because enforcement is suspended.

Who This Matters For

This isn't just a restaurant server issue. The IRS list of 68 customarily tipped occupations includes barbers, cosmetologists, tattoo artists, valets, movers, tour guides, and content creators. If you run a business that employs tipped workers — or if you're self-employed in a tipped occupation — this deduction is worth up to $25,000 off your taxable income.

At a 32% marginal rate, that's $8,000 in real tax savings.

The Bottom Line

The no tax on tips deduction is live for 2025 and runs through 2028. The IRS made it easy for 2025 by not requiring separate tip reporting on W-2s or 1099s and by suspending the SSTB exclusion rule. If you or your employees receive tips, make sure you're documenting them and claiming every dollar of this deduction on your 2025 return.