10/20/2025
“No tax on tips”
The “No tax on tips” provision in the OBBBA provides for an income tax deduction for “qualified tips” received by taxpayers performing services in an occupation that customarily and regularly received tips on or before Dec. 31, 2024.
The deduction is capped at $25,000 and is subject to phaseouts. This provision sunsets December 31, 2028.
Beginning with amounts earned in 2026 - employers qualified tips separately on information statements furnished to a service provider. Qualified tips are defined as cash tips received by an individual in an occupation that customarily and regularly received tips on or before Dec. 31, 2024. Qualified tips do not include any amount received by an individual unless the amount meets all of the following criteria:
They must be paid voluntarily without any consequence - not subject to negotiation, and is determined by the payor.
Satisfies such other requirements as may be established by the Secretary of the U.S. Department of the Treasury.
Requirement that tips be voluntary:
The proposed regulations include 10 examples to illustrate application of the requirement that tips must be paid voluntarily and determined by the payor without negotiation in order to qualify. The examples related to restaurant tipping illustrate that:
non-negotiable automatic charge added to a bill’s tip line would not be a qualified tip.
If an automatic charge is added to a bill’s tip line but there is also a line for “additional tip amount,” the automatic charge would not be a qualified tip, but an amount added to the “additional tip amount” line by a customer would be a qualified tip.
“Recommended tip” guidelines added to a bill with the option that a customer may disregard or modify the amount is not a service charge and the actual tipped amount is a qualified tip.
If a handheld point of sale device (POS) prompts a customer to leave a tip and provides the following options: 15%, 18%, 20%, “other”, and “no tip”, then an amount tipped would be a qualified tip since the customer voluntarily chooses to leave the tip. If the “no tip” option is not available, then the minimum percentage the customer is required to tip would not be a qualified tip but any amount in excess of that minimum percentage would be a qualified tip.
Licensed workers like Bartenders cannot use this exclusion.
