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US President Donald Trump arrives to speak on his policy to end tax on tips in Las Vegas, Nevada, on January 25, 2025.\u00a0<\/p>\n
Mandel Ngan | Afp | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
President Donald Trump’s “big beautiful bill”<\/a> includes a section called “no tax on tips”<\/a> \u2014 an idea that both Republicans and Democrats floated during the 2024 campaign.<\/p>\n Now that the provision has been enacted<\/a>, questions remain about how the tax break works and who qualifies.<\/p>\n Despite its name, “no tax on tips” doesn’t eliminate tax on tips, which are still subject to payroll and state taxes. Instead, it’s a deduction worth up to $25,000<\/a>. The tax break is available from 2025 through 2028.\u00a0It phases out, or gets reduced, once modified adjusted gross income exceeds $150,000.<\/p>\n However, the IRS needs to clarify which occupations qualify, which is expected to come in early October, according to the agency.\u00a0<\/p>\n Meanwhile, “we’re looking at a crystal ball” for guidance, said Larry Gray, a Missouri-based certified public accountant who serves as IRS liaison for the National Association of Tax Professionals.<\/p>\n More from Personal Finance:<\/strong> In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment<\/a>, according to estimates from The Budget Lab at Yale University.<\/p>\n The cohort of workers who qualify for the tax break is even smaller \u2014 actors, musicians and singers, directors and playwrights \u2014 are included among the professions<\/a> that are already prohibited under the legislation’s text.<\/p>\n Here’s a breakdown of what to know about Trump’s tip deduction.\u00a0<\/p>\n<\/div>\n As written, “qualified tips” are cash tips an employee earns. This includes tips a customer offers in cash or added to a credit card charge, as well as payouts under a tip-sharing arrangement.<\/p>\n Yet, the law also says that the tip must be paid voluntarily and determined by the customer or payor, which can put other forms of gratuities or mandatory service charges in question.<\/p>\n “It’s an entirely voluntary transaction,” said Alex Muresianu, a senior policy analyst at the Tax Foundation.\u00a0<\/p>\n<\/div>\n For example, the definition may exclude mandatory service fees, such as an automatic gratuity <\/a>a restaurant might tack on for a large dining party.\u00a0<\/p>\n “Based on the plain text of the law, it’s hard to argue that that’s something that’s given voluntarily,” said certified financial planner and enrolled agent Ben Henry-Moreland, a certified financial planner with advisor platform Kitces.com, who analyzed the legislation<\/a>.<\/p>\n<\/div>\n To qualify for the deduction, tips must be “properly reported,” according to Melanie Lauridsen, AICPA’s vice president of tax policy & advocacy.<\/p>\n That means employers must report the worker’s tips on so-called information returns<\/a> \u2014 such as Form W-2 or 1099 \u2014 with a copy going to the employee and the IRS.<\/p>\n However, Trump’s legislation also increased the income thresholds for certain information returns. That could raise eligibility questions for tipped workers who don’t get a form.<\/p>\n For example, Form 1099-K reports business transactions<\/a> from apps, such as PayPal<\/a>\u00a0or Venmo, along with gig economy platforms like Uber<\/a>
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Tips must be ‘properly reported’<\/h2>\n