No Tax on Tips Act (2025–2028): What Service Workers Need to Know

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The No Tax on Tips Act, signed into law in 2025, offers a groundbreaking tax break for tipped workers. Under this temporary provision, eligible service employees can deduct up to $25,000 in cash tips annually from their taxable income for tax years 2025 through 2028.

Here’s how this new law works, who qualifies, and what you must do to take advantage of this tax-free income opportunity.

What Is the No Tax on Tips Act?

Enacted as part of a broader legislative push to ease burdens on low-to-middle-income workers, the No Tax on Tips Act allows certain service industry employees to exclude up to $25,000 in cash tips per year from their gross income on their federal tax return.

This means that bartenders, servers, valets, salon workers, and others who receive tips as a significant part of their compensation could see lower tax bills starting in 2025.

Key Details of the Act

• Effective Years: 2025 through 2028
• Annual Deduction Limit: $25,000 in reported cash tips only
• Eligible Workers: Must receive tips in the course of regularly providing personal services
• Verification: Tip income must be properly reported through Form 4070 or employer payroll

Who Qualifies?

The IRS defines “tipped employees” as workers who customarily and regularly receive more than $30 per month in tips. To benefit from the No Tax on Tips Act, you must:

1. Be employed in a service role (e.g., food service, hospitality, personal care)
2. Receive direct cash tips (credit card and employer-paid tips may not qualify)
3. Report all tip income accurately to your employer or via IRS Form 4137

Note: Failure to report tips still carries penalties. The deduction only applies to reported income.

How to Claim the Tip Income Deduction

To benefit from this tax break:

1. Track your cash tips daily using IRS Form 4070 or a digital logbook.
2. Report total monthly tips to your employer by the 10th of each month.
3. File Form 1040 with the new deduction line once IRS updates Schedule 1 or issues additional guidance.

IRS implementation guidance is expected in late 2025. We’ll update this post when filing details are finalized. You can also check updates directly from the IRS website.

Tax Planning Tips for Tipped Employees

• Use a separate envelope or app to save a portion of untaxed tips for estimated tax payments.
• Even if exempt up to $25,000, track all tips to avoid underreporting penalties.
• Talk to a tax pro about whether you still need to pay self-employment or Medicare taxes based on total income.

Example Scenario

Maria works at a high-volume restaurant in Miami and earns around $36,000 in annual cash tips. Under the new law:

• She can exclude $25,000 from federal taxable income
• Only the remaining $11,000 is subject to income tax
• She could save over $3,000 in federal taxes depending on her bracket

What This Means for Service Industry Workers

This act effectively gives tipped workers a pay raise—by allowing them to keep more of their income. It also formalizes tip tracking and reporting, making it critical for workers to document accurately and file correctly.

If you’re in the service industry, now’s the time to:

• Set up a reliable tip-tracking method
• Consult a tax advisor to plan for 2025 filings
• Bookmark the IRS newsroom for updates

Stay Compliant and Maximize Your Refund

To maximize your benefit under the No Tax on Tips Act, the IRS will expect clean, consistent documentation. Use digital apps like Everlance, TipSee, or QuickBooks Self-Employed to track daily tips. Consider opening a business checking account to further separate income and expenses if you also earn freelance income.

Conclusion

The No Tax on Tips Act creates a significant opportunity for millions of U.S. service workers—but only if you prepare. Track, report, and file right to legally claim your tip income deduction starting in 2025.

We’ll continue monitoring IRS updates and reporting requirements as they roll out. For broader side hustle tax strategy, grab our full e-book: The Complete Guide to Building and Taxing Your Side Hustle Right.

Disclaimer

The information provided in this blog post is for informational purposes only and should not be construed as legal, tax, or accounting advice. Tax situations are often complex and highly specific to the individual or business. You should contact a qualified tax expert directly to discuss your particular circumstances. Nothing herein is intended to, nor does it, create an attorney-client or advisor-client relationship. For individual guidance, please contact us directly.