Do you earn tips waiting tables, making lattes, doing hair, or driving deliveries, and wonder how they’ll affect your taxes? A new federal law may help you keep more of your money. The One Big Beautiful Bill Act (signed July 4, 2025) created a “No Tax on Tips” deduction that could lower taxable income for many tip-earning Texans. Here’s what it means—and how to stay compliant.
What Is the “No Tax on Tips” Provision?
Despite the nickname, this is not a blanket exemption. It’s a federal income tax deduction for qualified tips, available for tax years 2025–2028. Qualified tips include voluntary cash or charged (credit/debit) tips that customers choose to pay, including tips received through tip sharing. The deduction is available whether you itemize or take the standard deduction.
Key limits and rules:
- Annual cap: Up to $25,000 of qualified tips may be deducted.
- Phase-out: Deduction phases out when modified AGI exceeds $150,000 (single) / $300,000 (married filing jointly).
- Self-employed: Deduction can’t exceed your net income from the business where the tips were earned.
- Filing requirements: You must include your SSN on the return and file jointly if married to claim the deduction.
- Reporting forms: Qualified tips must be reported on a Form W-2, Form 1099, or Form 4137.
Who It Applies To
This deduction is for workers in jobs the IRS deems “customarily and regularly” tip-based (the IRS will publish a list of occupations). Examples likely include:
- Restaurant servers and bartenders
- Baristas and café staff
- Salon/spa professionals
- Hotel, valet, bell staff
- Delivery drivers, rideshare drivers
Who It Doesn’t Apply To
The deduction does not cover:
- Mandatory service charges (automatic gratuities for large parties)
- Bonuses or incentive pay
- Non-cash “tips” such as tickets or merchandise
Note: Voluntary tips received through tip sharing can still qualify if reported correctly, but employer-imposed service charges remain taxable wages.
What This Means for Texas Workers & Employers
Texas has no state income tax, so this change affects federal taxes only. Practically, that means:
For workers:
- A potential reduction in taxable income for 2025–2028 if you receive qualified tips.
- You’ll still need to track and report tips accurately to claim the deduction.
For employers:
- New information-reporting duties for employees’ qualified tips.
- Payroll systems may need updates to separate qualified tips from service charges.
- The IRS has indicated transition relief for 2025.
Practical Tips to Stay Compliant
- Keep a daily tip log.
- Ask your employer how they’re tracking qualified vs. other amounts.
- Verify your occupation is on the IRS list once published.
- Watch the cap and phase-out limits.
- Save all tip documentation.
When to Seek Professional Help
Tip income rules can get confusing—especially when you’re dealing with pooled tips, service charges, or self-employment income. That’s where Powell Tax Law can help. Our Texas-based team understands how federal changes affect local workers and businesses, and we bring years of experience representing clients before the IRS. We offer clear, practical advice in plain English to help you stay compliant and make the most of the new “No Tax on Tips” deduction.
Have questions about whether your tips qualify or how to update payroll and reporting? Schedule a consultation with Powell Tax Law today.
