Understanding ‘No Tax on Tips’: Who Benefits and How it Works

Understanding the “No Tax on Tips” Policy

Despite the repeated promise of “no tax on tips” during the election period, many employees are left questioning why their paychecks remain comparable to the last year’s earnings.

Miklos Ringbauer, a certified public accountant, and founder of MiklosCPA Inc, stated that the policy’s workings still raise questions, especially as we approach the extended federal deadline of Oct. 15, 2025.

If you’re a eligible tipped worker who’s yet to benefit from this policy, or if you just started a tipped job this year, here’s a quick refresher on how it functions.

How the “No Tax on Tips” Policy Works

According to Ringbauer, some Americans got accustomed to receiving money directly from the government, especially during the COVID-19 pandemic when they received stimulus checks. This has caused some confusion about how to enjoy the benefits of the “no tax on tips” policy.

This policy did not mandate a change in payroll. It is a federal income tax deduction that eligible workers can claim when filing their taxes. Due to the fact that not all tipped workers qualify for the deduction, many employers have maintained the same withholding for their workers, which is why paychecks for tipped workers seem similar to those they received last year.

Average Deduction from “No Tax on Tips”

In June, the Treasury Department reported that more than 7.5 million taxpayers claimed the “no tax on tips” deduction earlier this year, getting an average deduction of $7,000. Among them, 90% reported an annual income under $100,000.

Not All Tips Are Tax-Free

Contrary to the catchy phrase, tips are not completely tax-free. Social Security and Medicare taxes still apply. Moreover, depending on where you live, tips might not be exempt from state and local income taxes. For instance, tips are still being taxed in Washington, DC, and New York.

Savings Aren’t Unlimited

Under the provisions of the tax and spending law signed last summer by President Donald Trump, eligible workers can deduct up to $25,000 in “qualified” tips from their taxable income. Whether you qualify depends on your earnings. The deduction phases out for single taxpayers with a modified adjusted gross income of $150,000, and for joint filers making $300,000 or more. It is not available for married couples filing separately.

Not All Workers Are Eligible

Only people working in jobs that “customarily and regularly” received tips before Dec. 31, 2024, are eligible for the tax benefit, according to the Treasury. The department’s list of qualified occupations includes many roles, such as bartenders, wait staff, maids, babysitters, drivers, travel guides, golf caddies, gambling dealers, clowns, DJs, electricians, plumbers, tutors, photographers, and more.

Not All Tips Qualify

Only “qualified tips” are eligible for the deduction. The IRS defines “qualified tips” as voluntary cash or charged tips received from customers or through tip sharing. Mandatory tips and automatically applied gratuity don’t count. Tips must be determined by the payor and given voluntarily.

“No Tax on Tips” Policy Isn’t Permanent

The “no tax on tips” deduction expires on Dec. 31, 2028, unless Congress extends it. Despite this, many tipped workers hope for its continuity, as it helps offset the lack of benefits they receive from their employers.

You may contact Rachel Barber at rbarber@usatoday.com or follow her on @rachelbarber_. You can subscribe to her newsletter “Making More of Your Money” here.