I heard tips are tax-free in 2025. Do I still need to report them on my return?

Yes, you still need to report tip income on your 2025 return — but whether you owe federal income tax on it depends on the new rules under the One Big Beautiful Bill Act (OBBBA).

What changed under the OBBBA:

The OBBBA introduced a federal income tax exclusion for tip income starting in 2025. If you work in a tipped occupation and receive tips from customers, those tips may be excluded from federal income tax up to the applicable limit. The exclusion applies to:

• Cash tips received directly from customers
• Tips charged to credit cards and paid out by employers
• Tips reported through tip-sharing arrangements

What did NOT change:

• Tips are still subject to FICA taxes (6.2% Social Security + 1.45% Medicare). The exclusion is only from income tax, not payroll taxes.
• You still must report all tip income. Tips remain fully reportable on your W-2 and tax return. The IRS still requires you to keep a tip diary or log if your employer doesn't track them.
• Unreported tips can still trigger IRS assessment using Form 4137 (Social Security and Medicare Tax on Unreported Tip Income).
• The exclusion has limits. Not all tip income qualifies — there are income phase-outs and restrictions on which occupations qualify. The IRS has published guidance; consult IRS.gov or a tax professional for the specific limits.

How to report tips on your 2025 return:

• Your employer should report tips on Box 7 (Social Security tips) and Box 8 (allocated tips) of your W-2.
• If you received cash tips that weren't reported to your employer, report them on Form 4137.
• The OBBBA exclusion is claimed on your Form 1040 — TurboTax, H&R Block, and other software will handle this automatically for 2025 returns.

Key takeaway: "No tax on tips" is partially accurate — it means no federal income tax on qualifying tip income for eligible workers, not that tips disappear from your return entirely.