What Employers Need to Know About “No Taxes on Tips”

What has been named the “Big Beautiful Bill” (the “Bill”) was signed into law on July 4, 2025. One of the provisions under the Act is identified as “no taxes on tips” and allows for a tax deduction of up to $25,000 for tips received by employees. This provision under the Act is retroactive to January 1, 2025.  As a result, some payroll and reporting changes must be made for the current tax year.  

The Details of No Taxes on Tips  

The bill establishes a new tax deduction for tips, subject to some limitations:  

• The tips must be received in an occupation that customarily receives tips, such as a service or hospitality occupation. Certain professionals are excluded such as those in law, accounting, healthcare and consulting, to name a few. 
• Only voluntary tips are included; mandatory service charges or automatic gratuities are excluded.  
• Employees will still pay state income tax on tips unless similar laws are passed at the state level.  
• The deduction is capped at $25,000.  The deduction is not applicable to employees whose  adjusted gross income exceeds $150,000 or $300,000 under a joint return. But the deduction is available regardless of whether the employees take the standard deduction or itemizes their taxes. 

Key Information for Employers

Here are a few things about the “no tax on tips” that employers need to know:  

• Accurate accounting of tips received must be reported, likely in a new line or box on Form W-2.  
• Employers will need to comply this year since the law is retroactive to Jan. 1, 2025. Reasonable estimates are expected to be allowed for the current year but employers should keep documentation of how they arrive at their “estimates.”   
• Some employers may be eligible for a Federal Insurance Contributions Act (FICA) tip credit. This has been expanded from food and beverage service businesses to include other service businesses such as beauty, hair care, nail care, spa treatments, among others. 
• FICA withholding remains unchanged and applies to all reported tips.  
• Changes to withholdings may occur in future years.