You may have seen headlines buzzing about a “No Tax on Tips” provision in the newly passed One Big Beautiful Bill Act. As catchy as that phrase sounds, it’s not quite accurate. The legislation does not exempt all tip income from taxation. What it does provide is a limited but meaningful deduction for certain workers and a series of administrative hurdles for employers.

Let’s break down what this new tip deduction is, how it works, and what business owners need to do now before it takes effect in 2025.

What the Tip Deduction Actually Does

Beginning with the 2025 tax year and continuing through 2028, employees in certain tipped occupations can deduct up to $25,000 in voluntary tip income. This deduction is claimed directly on their individual tax returns and is considered “above-the-line,” which means it can be taken even if the taxpayer does not itemize.

But this isn’t a get-out-of-tax-free card. Employers must still withhold and remit payroll taxes such as Social Security, Medicare, and income tax on all reported tips. The deduction only applies when the tip income is voluntarily and the employee is in a qualifying role.

Who Qualifies

The deduction is only available to employees in roles that are “customarily and regularly tipped,” as defined by the Treasury Department based on conditions as of December 31, 2024. An official list of qualifying occupations is expected by October 2, 2025. Think servers, bartenders, baristas, salon employees and others in roles where tips make up a significant portion of income.

The deduction also phases out for high-income earners. Individuals with a modified adjusted gross income above $150,000, or married couples filing jointly with income over $300,000, will begin to see the benefit reduced. For every $1,000 over the threshold, the deduction decreases by $100.

Only truly voluntary tips such as cash left on a table or tips added to a credit card qualify. Service charges, automatic gratuities, or tips mandated by contract are excluded.

?Why Employers Should Pay Attention

Even though the deduction is taken by employees, the burden of compliance falls squarely on employers. New reporting rules require businesses to include not just total tips on each employee’s W-2 form, but also to list the employee’s job title or occupation. This level of detail is intended to help the IRS enforce the new deduction rules and verify that only eligible workers are claiming the benefit.

For the 2025 tax year, employers may rely on reasonable estimates to comply. But starting in 2026, exact tracking and reporting will be required. That means employers will need to evaluate their payroll systems now and ensure they’re equipped to track both tips and occupations accurately. Businesses with manual payroll systems or limited HR infrastructure may need to upgrade or seek outside help to stay compliant.

What Business Owners Should Do Now

First, identify which of your employees are in traditionally tipped roles. This is not a time for guesswork. Documentation and consistency will be key. Second, work with your payroll provider to begin implementing systems that can isolate and track tip income separately. Many providers will also need to update their platforms to accommodate new W-2 reporting fields for job classifications.

Educate your staff about the change as well. Emphasize that this is not tax-free income, it’s a deduction they can take on their tax return only if the tips are reported and properly documented.

Finally, monitor IRS guidance. With the law passed, the next step is for Treasury and the IRS to release official regulations and implementation instructions. These are expected throughout late 2025 and early 2026. Faw Casson will continue to monitor developments and provide timely updates as guidance becomes available.

The Bottom Line

The Tip Deduction in the OBBB Act is not a tax holiday for tips. It’s a targeted deduction designed to benefit certain employees in service industries who voluntarily report their tips and it comes with plenty of strings attached for employers. While it may provide some financial relief to workers, it also increases compliance obligations and documentation requirements for businesses.

Plan now, train your team, and make sure your payroll systems are ready. Because while the deduction might help employees at tax time, it will be up to you to make sure it’s tracked and reported properly.

Faw Casson will be following the release of Treasury regulations closely and will continue providing guidance as more details become available.