Do I really pay no taxes on tips in 2025 under the new law?

Not exactly. Tips are still taxable income, but you can now deduct qualified tips from your taxable income under the One, Big, Beautiful Bill Act (OBBBA) for tax years 2025 through 2028. The effective result is zero federal income tax on those tips for most workers.

Who qualifies?

To claim the deduction, you must:

• Work in an occupation that customarily receives tips (hospitality, food service, beauty/barber services, delivery, valet parking, etc.)
• Have earned tips voluntarily given by customers, not mandatory service charges or employer-added gratuities
• Be within the income phaseout range: phases out starting at $150,000 (single) or $300,000 (married filing jointly)

How to calculate your qualified tips:

• Use your tip records from Form 4070 (daily tip log), credit card receipts, or employer-provided summaries
• The IRS issued Notice 2025-69 to help workers calculate deductible tips even if Form W-2 does not separately identify tip amounts
• Cash tips you failed to report to your employer in 2025 are still taxable income and do NOT qualify for the deduction. Only reported tips qualify.

What you still owe on tips:

• Social Security and Medicare (FICA) taxes are not eliminated. You still pay 7.65% on tip income.
• State income taxes — most states have not adopted the federal tip deduction, so you may owe state tax on tips even if you owe no federal income tax
• Tips are still subject to federal income tax withholding during the year. You'll get a refund of overtaken tax when you file.

How to claim it:

Report all tips as income (Box 1 and Box 7 of W-2, or on Schedule C for self-employed). Then claim the deduction on Schedule 1 as an above-the-line deduction. The IRS updated forms for the 2026 filing season.