No Tax on Tips, explained in plain English

"No tax on tips" became law in 2025, and the headline oversells it a little. Tips didn't become tax-free, but for tax years 2025 through 2028, many tipped workers can deduct up to $25,000 of qualified tip income a year from their federal income tax. For a typical server or bartender, that can zero out the federal income tax on tips entirely. Here's what it actually does, in order.

What the deduction is

• It's a federal income tax deduction, up to $25,000 of qualified tips per year, for tax years 2025–2028.
• You can claim it even if you take the standard deduction: you don't need to itemize.
• It covers W-2 employees and 1099 workers alike, as long as the occupation is on the government's list of jobs that customarily receive tips: serving, bartending, delivery, salons, and most classic tipped work qualify.

What it is not

• It does not touch Social Security and Medicare. FICA (7.65% as an employee, 15.3% self-employed) still applies to every tipped dollar.
• It does not touch state income tax. If your state taxes wages, it still taxes tips.
• It is not a reason to stop reporting tips. The deduction happens on your tax return; the tips still have to be reported to get it. Unreported tips remain unreported income.
• It is not permanent. As written, it expires after the 2028 tax year.

The income phase-out

The $25,000 cap shrinks for higher earners: $100 of cap disappears for every $1,000 of income above $150,000 (single) or $300,000 (married filing jointly). That means the deduction is fully gone at $400,000 single / $550,000 joint. Most tipped workers are nowhere near the phase-out, but a high-earning household filing jointly should run the numbers.

To see your own cap and rough savings, use the No Tax on Tips calculator.

What to do differently

• Keep reporting everything. The deduction rewards reported tips; it does nothing for unreported ones.
• Keep setting aside, just less for federal. If your tips fit under the cap, the federal-income-tax slice of your set-aside can drop toward zero, but FICA and state still need their share. The tax set-aside calculator handles all three together.
• Keep records. A daily log of tips by shift is exactly the paper trail you want if the IRS ever asks how you got to your number.

An example

A server making $48,000 total, of which $22,000 is tips: all $22,000 fits under the cap, so at a rough ~11% blended federal rate the deduction is worth about $2,400 a year. The server still owes FICA on the tips (~$1,680) and state tax where applicable, which is why the right response is "adjust the set-aside," not "stop setting aside."

For the wider picture (which taxes apply to tips, what is withheld, and what you are required to report), start at are tips taxable.

This guide summarizes a federal law in plain English and simplifies edge cases. It isn't tax advice; the details of qualified occupations, qualified tips, and your own return belong with a tax professional.