Ask the Experts: No Tax on Tips
By: Mark Burzych | Fahey Schultz Burzych Rhodes PLC
Q: What does the "Big Beautiful Bill" Mean for Tipped Workers?
A: :In a move that many considered a major win by the Trump Administration, the recently passed "One Big Beautiful Bill" (OBBB) included provisions to reduce federal income taxes on tip income. Branded the “No Tax on Tips Act,” this component of the Bill is meant to ease the tax burden for workers who earn a significant portion of their income through tips, specifically those in the hospitality and food service industry.
Starting in the 2025 tax year, eligible workers may deduct up to $25,000 a year in tip income from their federal taxable income. This provision applies to individuals in occupations designated as “customarily and regularly” receiving tips. The Department of Treasury was ordered to create a list of occupations that fit that designation. This new deduction will be available until December31, 2028.
Importantly, this is not a blanket exemption on tip earnings, but rather a federal income tax deduction. That means tip income still counts for purposes of Social Security, Medicare, and employment insurance taxes, and it may still be subject to state and local income taxes depending on the jurisdiction.
To qualify for this new deduction, workers must:
1. Be employed in a Department of Treasury-approved tipped occupation;
2.Report their tips to their employer in accordance with IRS requirements;
3.Receive tip income that is reflected on a W-2 or Form 1099.
The Department of Treasury has 90 days (early October) to compile a list of occupations that qualify as an “approved tipped occupation.” The deduction is targeted at working and middle-class earners. As such, individuals earning more than $150,000 (or couples earning more than$300,000)per year will see the deduction gradually reduced. The purpose of the new deduction is to provide significant tax savings for workers and increase take-home pay.
Also, the Bill expands the FICA tip credit for businesses, making it available for barbering, nailcare, spa treatments, and other forms of beauty services. The FICA tip credit is a dollar-for-dollar credit against the employer’s income taxes for the employer’s share of the FICA taxes paid on employees’ tip income. As implementation begins in the 2025 tax season, employers and employees alike are urged to familiarize themselves with the new rules to ensure they maximize the available benefits.
Michigan legislators have proposed their own versions of a no tax on tips statute. House Bill 4051and Senate Bill 91 are both intended to exempt tipped income from state income taxes. Both are currently stuck in committee, with no significant movement since early in the year. Until new legislation is passed tipped income is not exempt from Michigan income taxes.
A: :In a move that many considered a major win by the Trump Administration, the recently passed "One Big Beautiful Bill" (OBBB) included provisions to reduce federal income taxes on tip income. Branded the “No Tax on Tips Act,” this component of the Bill is meant to ease the tax burden for workers who earn a significant portion of their income through tips, specifically those in the hospitality and food service industry.
Starting in the 2025 tax year, eligible workers may deduct up to $25,000 a year in tip income from their federal taxable income. This provision applies to individuals in occupations designated as “customarily and regularly” receiving tips. The Department of Treasury was ordered to create a list of occupations that fit that designation. This new deduction will be available until December31, 2028.
Importantly, this is not a blanket exemption on tip earnings, but rather a federal income tax deduction. That means tip income still counts for purposes of Social Security, Medicare, and employment insurance taxes, and it may still be subject to state and local income taxes depending on the jurisdiction.
To qualify for this new deduction, workers must:
1. Be employed in a Department of Treasury-approved tipped occupation;
2.Report their tips to their employer in accordance with IRS requirements;
3.Receive tip income that is reflected on a W-2 or Form 1099.
The Department of Treasury has 90 days (early October) to compile a list of occupations that qualify as an “approved tipped occupation.” The deduction is targeted at working and middle-class earners. As such, individuals earning more than $150,000 (or couples earning more than$300,000)per year will see the deduction gradually reduced. The purpose of the new deduction is to provide significant tax savings for workers and increase take-home pay.
Also, the Bill expands the FICA tip credit for businesses, making it available for barbering, nailcare, spa treatments, and other forms of beauty services. The FICA tip credit is a dollar-for-dollar credit against the employer’s income taxes for the employer’s share of the FICA taxes paid on employees’ tip income. As implementation begins in the 2025 tax season, employers and employees alike are urged to familiarize themselves with the new rules to ensure they maximize the available benefits.
Michigan legislators have proposed their own versions of a no tax on tips statute. House Bill 4051and Senate Bill 91 are both intended to exempt tipped income from state income taxes. Both are currently stuck in committee, with no significant movement since early in the year. Until new legislation is passed tipped income is not exempt from Michigan income taxes.
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