Who makes the cut for “no tax on tips”?

If you have clients in tip-heavy industries, 2025 brings significant tax changes. Thanks to the One Big Beautiful Bill Act (OBBBA), there’s a brand-new deduction, which is commonly called the “No Tax on Tips” provision. However, this moniker may be deceiving and is not necessarily accurate; it’s technically a deduction, not a full tax exemption.

Starting with tax year 2025, certain employees and self-employed individuals working in tip-based arenas may deduct qualified tips they receive. The catch? Only jobs that “customarily and regularly received tips” as of Dec. 31, 2024, will be included. The IRS will finalize and publish the official list of qualifying occupations by Oct. 2, 2025, but a preliminary list already gives us a solid idea of who’s in and who’s out.

Let’s dig into the details so you can advise your clients effectively.

What exactly is the tips deduction?

Under this new rule, qualified tips can be deducted against income for tax years 2025 through 2028. Qualified tips are defined as:

• Voluntary cash or charged tips received directly from customers
• Tips received through pooling or tip-sharing arrangements

The maximum deduction is $25,000 per year. For self-employed taxpayers, the deduction is limited to net income from the trade or business in which the tips were earned. Importantly, this deduction is available whether or not the taxpayer itemizes deductions on Schedule A, Itemized Deductions.

But there are guardrails. Self-employed individuals in a specified service trade or business (SSTB) under §199A and employees whose employers are SSTBs are not eligible for the deduction.

The preliminary job list

According to a preliminary analysis shared by the Treasury, about 68 occupations across eight broad industries could qualify for the tip break:

1. Food and beverage – bartenders, servers, baristas, bussers, hosts, sommeliers
2. Hospitality – bellhops, hotel concierges, casino workers
3. Entertainment – DJs, musicians in tip-based settings, street performers
4. Personal Services – nail technicians, hairstylists, makeup artists
5. Transportation – rideshare drivers, taxi drivers, limousine chauffeurs
6. Home Services – movers, delivery workers, valets
7. Wellness – massage therapists, spa attendants
8. Recreation – golf caddies, tour guides, ski instructors, influencers

The list focuses on occupations where tips are customary and expected. It does not include health care workers, salaried entertainers or others in industries where tips are not a regular part of compensation.

Income limits and phase-out rules

The deduction isn’t universal. It comes with income caps:

• Full deduction available for taxpayers with modified adjusted gross income up to $150,000 (single) or $300,000 (married filing jointly)
• Above those thresholds, the deduction begins to phase out

Married taxpayers must file joint returns to claim the deduction, and all filers must include their Social Security numbers on the tax return.

Reporting requirements

The law also includes new employer and payor obligations. Businesses with tipped workers must file information returns with the IRS (or Social Security Administration) and furnish employees with statements that show:

• Certain cash tips received
• The occupation of the tip recipient

For taxpayers, tips must be properly reported on

• Form W-2, Wage and Tax Statement
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-K, Payment Card and Third Party Network Transactions, or
• Directly by the individual on Form 4137, Social Security and Medicare Tax on Unreported Tip Income

To ease the transition, the IRS will provide relief for 2025 as employers adjust to these new reporting rules.

Why this matters for your clients

For many service workers, tips make up a large portion of total income. Historically, those tips were treated as wages, subject to income and payroll taxes. While payroll tax treatment isn’t changing, this new deduction offers meaningful relief on the income tax side.

For example, a bartender earning $40,000 in wages and $20,000 in tips, could potentially deduct all $20,000 in tips (subject to the $25,000 cap and income phase-outs). That’s a significant reduction in taxable income and a chance to lower overall tax liability.

The deduction can be especially valuable for self-employed individuals, like rideshare drivers. However, they’ll need to ensure their net income is high enough to absorb the deduction, since it can’t exceed business income.

Key tax planning opportunities

Here’s how you should be advising your clients:

• Track tips carefully: Documentation will be more important than ever. Encourage clients to keep daily logs or use employer-provided reporting systems
• Check eligibility: Not every tipped role qualifies. Use the preliminary list now, but confirm against the IRS’s final October 2025 listing
• Watch income thresholds: High-earning clients may see their deduction reduced or phased out.
• Prepare employers: Businesses with tipped staff must update payroll systems to accurately capture and report tips and occupations
• Flag SSTBs: Remember that employees and owners in specified service businesses (such as law, accounting, or consulting) may not utilize this deduction

The “No Tax on Tips” deduction is one of the OBBBA’s most taxpayer-friendly provisions. It offers relief to millions of service workers who rely on tips to make a living. It’s both a planning opportunity and a compliance challenge for tax professionals.

Your role? Help clients understand their qualifications, how to keep meticulous records and prepare for new reporting rules. With the right guidance, bartenders, rideshare drivers, nail techs, tour guides and many others can take full advantage of this temporary tax benefit before it sunsets after 2028.