New Law Makes Tips Tax-Free for Millions of Americans

In a significant development, President Donald Trump signed the One Big Beautiful Bill Act (OBBB) into law on July 4, 2025. This legislation includes a groundbreaking provision that makes tips tax-free for millions of Americans. The No Tax on Tips Act, which has already passed the U.S. Senate, allows tipped workers to deduct up to $25,000 of tip income from their taxable earnings.

This move is expected to benefit millions of service industry employees who rely heavily on tips to make ends meet. Currently, tipped workers are required to report their tips as taxable income, and employers must withhold taxes. However, under the new law, tips would still need to be reported but would no longer be subject to federal income taxes.

Key Details of the No Tax on Tips Act:

Eligible Occupations: The deduction applies to tips received in industries where tipping is customary, such as food service or hospitality. The IRS will provide further guidance on qualifying occupations.

Deduction Amount: Up to $25,000 of qualified tip income can be deducted from taxable earnings.

Phase-out: The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Reporting Requirements: Tips must be reported on Form W-2 or Form 1099, and employers must separately report the total amount of cash tips ¹ ².

Supporters of the bill argue that it will deliver financial relief to millions of Americans, particularly those in the service industry. Senator Ted Cruz of Texas, who introduced the bill with Senator Jacky Rosen of Nevada, emphasized the importance of fairness for tipped workers. “These workers are putting in long hours and living paycheck to paycheck. They deserve to keep more of what they earn,” Cruz said.

The bill’s impact on federal deficits is estimated to be $3.4 trillion over the next decade, according to the Congressional Budget Office. While critics argue that the law disproportionately benefits select groups and worsens the nation’s debt outlook, supporters believe it will ease burdens on small businesses, increase take-home pay, and help stabilize tourism-dependent economies ².