No Tax on Tips 2025: The Guide for Small Business Owners and Employees

The new “no tax on tips” deduction starts in 2025, allowing employees and self-employed workers to deduct up to $25,000 in qualified tips annually. This tax deduction on tips will last from 2025 through 2028 and significantly impacts tipped workers in restaurants, bars, salons, hotels, and other hospitality businesses.

Small business owners in tipped industries need to understand new IRS reporting requirements, while employees can benefit from substantial tax savings. Here’s your guide to the 2025 no tax on tips policy.

How the 2025 No Tax on Tips Deduction Works

Who qualifies for the tip tax deduction? Employees and self-employed workers in jobs the IRS considers “customarily tipped occupations.” The IRS will publish an official list of eligible tipped jobs by October 2, 2025. Both taxpayers who itemize deductions and those taking the standard deduction can claim this tip deduction.

What tips qualify for the tax deduction? Cash tips and credit card tips that customers give voluntarily, including shared tips through tip pooling arrangements. Automatic service charges and mandatory gratuities do not qualify. Tips must be properly reported on Form W-2, Form 1099, or other IRS forms, or reported directly by workers on Form 4137.

Maximum tip deduction amount: Tipped workers can deduct up to $25,000 annually. Self-employed individuals cannot deduct more than their net business income from tip-earning activities.

Income limits for tip deduction: The deduction phases out for workers earning over $150,000 (or $300,000 for married couples filing jointly).

Required qualifications for tip tax savings:

  • Workers must include their Social Security number on tax returns
  • Married taxpayers must file joint returns to claim the tip deduction

Who Cannot Claim the Tips Tax Deduction?

Certain workers won’t qualify for the no tax on tips benefit, even if they receive gratuities:

  • Self-employed professionals in Specified Service Trade or Business (SSTB) categories like law firms, accounting practices, medical offices, or financial services
  • Employees of SSTB businesses in professional services industries

These exclusions apply to what the IRS defines as professional service businesses. Restaurant workers, bartenders, salon employees, hotel staff, and similar hospitality workers should qualify. Check the official IRS tipped occupations list in October 2025 for confirmation.

IRS Reporting Requirements for Employers Under No Tax on Tips Rules

Small business owners don’t claim the tip deduction themselves, but face IRS reporting obligations:

  • File information returns with the IRS or Social Security Administration documenting employee tips received
  • Provide written statements to tipped employees showing reported tip amounts and job classifications
  • Comply with reporting rules even if already handling tip reporting for payroll taxes

Failing to meet these tip reporting requirements could create compliance issues for your business and problems for employees claiming their tip tax deductions. Update your payroll systems and record-keeping processes accordingly.

What This Means for Your Business

Better Recruiting and Retention: This deduction makes tipped jobs more attractive. Employees get to keep more of what they earn, which may help you compete for workers.

Employee Education: Workers may come to you with questions. While you can’t give tax advice, you can point them to IRS resources or encourage them to speak with a tax professional.

More Accurate Tip Reporting: Since employees benefit directly from reporting their tips, they may be more motivated to report accurately. This could make compliance easier for your business.

Industry Classification Matters: If your business falls into a professional service category (such as law, accounting, health, or financial services), your employees will not qualify. Check the IRS occupation list when it’s released in October 2025.

Transition Relief in 2025

The IRS will provide “transition relief” for the 2025 tax year. This means that both employers and employees will get extra time and flexibility as the new rules are rolled out. Details are still to come, but expect more guidance before the end of 2025.

Key Takeaways for Owners

  • You don’t get the deduction, but your workers do
  • You must file reports with the IRS about tips and employee job titles
  • The maximum deduction is $25,000 per worker, with income limits for high earners
  • Married workers must file jointly to get the deduction
  • Workers in professional service businesses won’t qualify
  • The IRS will publish the official list of eligible jobs by October 2025

By staying informed and keeping your payroll systems up to date, you can help your employees take full advantage of this new tax break—while keeping your business compliant.