Tax Planning
Maximizing the No Tax on Tips Deduction Under the One, Big, Beautiful Bill
New from the One, Big, Beautiful Bill Act: qualifying employees can deduct tips under specific occupations—here's how to take advantage and stay compliant.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## What is the No Tax on Tips Deduction?
Under Section 70201 of the One, Big, Beautiful Bill (OBBB), individuals in certain occupations can **deduct qualified tips** they receive, making them exempt from income tax for those tip amounts. These tips must be reported on a Form W-2, Form 1099, other specified statement, or directly on Form 4137. The deduction applies for tax years **2025 through 2028**. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## Who Qualifies—Occupations, Tips, and Limits
Many service jobs are covered—think bartenders, servers, bellhops, and delivery drivers. The IRS released proposed regulations and a list of nearly **70 occupations** that are considered to “customarily and regularly” receive tips. To qualify:
- Tips must be **voluntary** from customers (not automatic service charges).
- Payments can be in cash, check, cards, or even mobile payment apps, but **digital assets generally excluded**. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- The taxpayer’s occupation must be on the designated occupations list and include tip sharing/tip pooling when relevant. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
## How Much Can You Deduct?
- Maximum annual deduction: **$25,000** per individual; **$12,500** if filing separately, or other scenarios depending on AGI/filing status. Note: for self-employed individuals, deduction can’t exceed net business income. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- Phase-out begins when Modified Adjusted Gross Income exceeds **$150,000** for single filers; **$300,000** for married filing jointly. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## Transition and Reporting Rules for 2025
If this is your first year claiming the new deduction, be aware of reporting obligations:
- Employers must provide statements showing cash tips received and occupation of tip earners. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- Transition relief is available in 2025 for those subject to reporting requirements under OBBB. Some employers/payors may get temporary leniency for late reporting or incomplete statements. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## Practical Examples
- **Solo waiter**: Maria works as a server in a restaurant, making $20,000 in tips in 2025. She files single, earns AGI $45,000. She can deduct up to $25,000 in qualified tips—so she deducts the full $20,000, lowering her taxable income accordingly.
- **Married delivery driver**: John and Lisa file jointly. John (delivery driver) makes $30,000 in tips and has self-employment income $25,000. He can deduct all $25,000 he earned in net income, but not more than that. The rest drops off.
## Action Steps
- Confirm whether your occupation is on the IRS list—keep an eye on final regulations. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- Keep **detailed records** of tip amounts—including cash, card, and shared tips.
- Employers: ensure tip statements include occupation and cash-equivalent payments.
- Tax professionals: help clients understand phase-outs and income limits to optimize this deduction.
## Key Takeaways
- The No Tax on Tips deduction offers a valuable benefit for workers in service occupations—but only when reporting, occupation, and income thresholds are correctly met.
- Transition relief mitigates early-year challenges during 2025, but full compliance from 2026 onward is essential.
- This goes hand-in-hand with broader OBBB changes like inflation adjustments and new deductions; coordinate planning so you’re not missing overlapping opportunities or obligations.
By staying informed, keeping great records, and understanding the eligibility map, qualified tip-earners can significantly reduce their taxable income starting in 2025 and through 2028.