‘No Tax on Tips’ is now the law: What workers should know about timeline, how paychecks will be impacted

The “No Tax on Tips” provision, passed and signed into law on July 4 as part of President Donald Trump’s One Big Beautiful Bill Act, allows eligible tipped workers to deduct a portion of their income from tips on their federal income taxes.

There is a catch: It’s only a temporary provision, expiring in 2028 when Trump leaves office at the end of his second term. But the good news is that eligible workers can start deducting up to $25,000 of reported tip income for their upcoming 2025 tax year.

Here’s what else to know.

How ‘No Tax on Tips’ affects tax filing and paychecks

This is a deduction, not an exemption, which means tipped workers will still need to report their tips when filing their taxes, instead of having the tips automatically taken out of taxable income, per Kiplinger.

The No Tax on Tips provision also does not eliminate payroll taxes (like Social Security and Medicare) on tips, so you’ll still need to pay those.

Who qualifies for ‘No Tax on Tips’?

The No Tax on Tips deduction applies for those earning income up to $150,000 a year, or $300,000 for joint filers, which will be adjusted each year for inflation.

Furthermore, it applies for “customarily tipped” workers. The U.S. Treasury Department and Internal Revenue Service (IRS) have yet to issue guidance on which jobs and occupations qualify, so stay tuned.

However, the bill is likely to apply to workers that rely on tips, such as hair stylists, nail techs, restaurant servers, and bartenders, per Kiplinger.

As Fast Company previously reported, No Tax on Tips also expands the business tax credit for the portion of payroll taxes that an employer pays on certain tips, to include payroll taxes paid on tips received in connection with certain beauty services, just like for restaurants.

No tax on overtime pay

Finally, the No Tax on Tips provision also applies to overtime pay, and a deduction will be available to eligible taxpayers regardless of whether they itemize. However, filers will have to provide their Social Security number on their 1040 form (or that of their spouse when filing jointly) in order to claim the deduction.