💼 New Law Allows Tip Income Deduction: What Service Workers Need to Know

August 2025 — As part of the recently passed One Big Beautiful Bill Act, a new provision—Section 70201, “No Tax on Tips”—introduces a significant change to how tip income is treated under federal tax law.

The law allows certain workers to deduct qualified tip income from their taxable income, up to a specified limit. Here's a straightforward breakdown of what this means, who qualifies, and how it works.

🧾 What the Law Does

Under Section 70201:

• Individuals can deduct up to $25,000 per year in qualified tips from their taxable income.

• The deduction applies to both employees and some self-employed individuals in occupations where tipping is customary.

  
  

👥 Who Is Eligible?

The deduction is intended for workers in occupations that regularly received tips as of December 31, 2024.

Examples may include:

• Restaurant servers and bartenders

• Hairstylists and barbers

• Nail technicians

• Spa and massage service providers

  
  

The Treasury Department is required to publish an official list of qualifying occupations within 90 days of the law’s enactment.

💵 What Counts as a "Qualified Tip"?

To qualify for the deduction, tips must meet the following conditions:

• Voluntarily paid by the customer

• Not negotiated or required as part of the service

• Determined solely by the customer

• Reported properly to the IRS

  
  

Both cash and charged tips (including those received through tip-sharing) may qualify if they are documented using approved IRS forms.

🧮 Income Limits and Phase-Out

• The full $25,000 deduction is available to individuals with modified adjusted gross income (MAGI) below:

  
  

  • $150,000 for single filers

  • $300,000 for joint filers

    
    

• Above those thresholds, the deduction is reduced by $100 for every $1,000 over the limit, until it phases out entirely.

  
  

👩‍💼 What About Self-Employed Individuals?

Self-employed individuals (e.g., independent contractors) may also claim the deduction, but only if:

• The tips were received in the course of their trade or business, and

• Their gross income from that business (including tips) exceeds deductible expenses for that business.

  
  

📋 Key Requirements to Claim the Deduction

To take advantage of the deduction, individuals must:

• Report tips using IRS Form 4137 (or its successor), or receive them on official wage statements

• Include their Social Security number on their tax return

• File a joint return if married

  
  

🧾 Updated Reporting and Employer Rules

To support the deduction and prevent abuse, several tax reporting forms are being updated to include:

• A breakdown of tip income

• The occupation of the tip earner

  
  

This includes forms used by employers (W-2, 1099) and third-party payment processors. A transition rule will allow approximate reporting for tips received before 2026.

🛑 Limitations and Sunset Date

• The deduction is not available for individuals working in a specified service trade or business (SSTB), such as consulting, law, or certain health services—unless they're employees of a qualifying business.

• This provision is temporary and applies only to tax years 2025 through 2028, unless extended by future legislation.

  
  

💡 Other Changes: Tip Credit Expansion

The law also expands the existing tip credit for employers to cover:

• Barbering and hair care

• Nail care

• Esthetics

• Body and spa treatments

  
  

This change aligns tip credit eligibility with the newly recognized tipped occupations.

📅 Effective Date

The deduction and reporting changes take effect for taxable years beginning after December 31, 2024.

🔍 Summary

The new tip deduction law provides a limited, income-based tax benefit for workers in traditionally tipped occupations. While it introduces new reporting requirements and has a set expiration date, it represents a notable shift in how tip income is treated under the tax code.

Workers and employers in service industries should monitor guidance from the IRS and Treasury Department as implementation details and occupational definitions are finalized.

The information provided in this blog post is intended for general informational purposes only and should not be construed as legal or tax advice. While every effort has been made to ensure the accuracy of the information, tax laws and regulations are subject to change, and individual circumstances may vary. For personalized advice and to ensure compliance with current tax laws, it is strongly recommended that you consult with a qualified tax professional, financial advisor, or legal counsel. The author and publisher of this blog assume no responsibility for any errors or omissions, or for any actions taken based on the information contained herein.