Understanding the Implications of the No Tax on Tips Rule
September 10, 2025
Under the new One Big Beautiful Bill Act (OB3), qualified tips are any cash tip received by an individual with a valid Social Security number and in an occupation that 'customarily and regularly' received tips on or before Dec. 31,2024. They include tips that are paid in cash or charged.
The Treasury Department has not yet released the “official” list of occupations that qualify for the No Tax on Tips Regulations. It is expected, though, that the job titles will include but not be limited to those listed below:
1) Food & Beverage: Bartenders, Wait Staff, Servers, Chefs, and Cooks
2) Entertainment:
Gambling Dealers, Change Persons, Booth Cashiers, Dancers, Musicians, Singers, Entertainers, and Other Performers
3) Personal Services:
Personal Care Workers, Private Event Planners, Photographers, Videographers, Event Officiants, Pet Caretakers, Tutors, Nannies, and Babysitters.
4) Personal Appearance & Wellness:
Skincare Specialists, Massage Therapists, Barbers, Hairdressers, Cosmetologists, Manicurists, Exercise Trainers, and Group Fitness Instructors.
5) Recreation: Golf Caddies, and Tour & Travel Guides.
6) Transportation: Ride Share, Taxi, and Food Delivery, Drivers, Porters, and Sky Caps.
The final list is expected to be issued in October, 2025.
Some implications of the No Tax on Tips Regulations.
First, the deduction is for qualified tips of up to $25,000 per year regardless of how many employers you have during the year. The tax savings will be in the form of a tax deduction when you file your Federal tax return the following year.
Second, qualified tips must be reported to the individual on one of three forms to be eligible for the deduction; a) Form W-2; b) Form 1099-NEC, Nonemployee Compensation; or c) Form 1099-K, Payment Card and Third-Party Network Transactions.
Third, it only applies to Federal income taxes. It does not include State, Local, Social Security or Medicare taxes.
Finally, the maximum annual deduction of $25,000 for single filers and $25,000 each for joint or married filing separately filers phases out by $100 for each $1,000 for taxpayers with modified adjusted gross income over $150,000 (or $300,000 for joint filers).
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First, working overtime does not mean you are getting an automatic increase in your take-home pay because it is not going to be taxed. That is not what is going to happen. The tax savings will be in the form of a tax deduction when you file your Federal tax return the following year. There will be no immediate impact. Second, it only applies for Federal income taxes. It does not include State, Social Security or Medicare taxes. Third, it also only applies to the overtime premium and within certain deduction and wage limits. You can only deduct the pay that exceeds your regular rate of pay. The 'half' portion of 'time-and-a-half' compensation. For example, say you make $20 per hour and work 5 hours of overtime that week at time-and-a-half. The deduction would the Federal tax on $50 of premium pay. ($20 divided by 2 times 5 hours) Finally, the maximum annual deduction is $12,500 for single filers and $25,000 for joint filers. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 (or $300,000 for joint filers).
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