What Are The New Rules Surrounding Taxes On Tips?
The One Big Beautiful Bill (OBBB) outlined a number of changes for employers to follow—including taxes on overtime and 1099 limits.
But one of the biggest changes has been to taxes on tips.
In short: They no longer apply! Well, within certain exceptions.
Read on to learn the rules as the IRS explains them:
What Are The New Rules Surrounding Taxes On Tips?
As the IRS explains, the new rule eliminates taxes on qualified tips for tax years 2025 through 2028. The maximum annual deduction is $25,000, and the benefit begins to phase out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000, if they file jointly).
What Are ‘Qualified’ Tips?
Under the OBBB, qualified tips are voluntary cash or charged tips given from the customer to an employee, either directly or through any sort of tip sharing program. Important note: These new rules do not apply to mandatory gratuities. So, if you have a restaurant that automatically imposes a 15% or 20% gratuity to the bill, those tips are still taxed normally.
What Taxes Still Apply?
The exemption laid out in the OBBB only applies to federal taxes. That means employees are still on the hook for:
- Social Security
- Medicare
- State Taxes (as applicable)
- Local Taxes (as applicable)
Who’s Impacted By the New Rules On Tips?
While the rules can impact any employees who receive qualified tips, the rule change may have the biggest positive impact on the following industries:
- Beverage and Food Service
- Entertainment and Events
- Hospitality and Guest Services
- Home Services
- Personal Services
- Personal Appearance and Wellness
- Recreation and Instruction
- Transportation and Delivery
That said, the rules are most likely to benefit:
- waiters
- bartenders
- salon workers
- personal trainers
- gig economy workers
Find Accurate Payroll Support
If the recent rule change makes you feel flustered, contact us! Our team is standing by to provide accurate and timely payrolls for your team.