In one of the most widely publicized provisions of the new tax reform bill, Congress is introducing a brand-new tax break: a deduction for tips received by workers in service industries. Marketed as a win for middle-class workers, this provision creates real tax savings for employees who earn income primarily through tips — including servers, bartenders, salon professionals, and more.
Let’s break down what’s changing, how the deduction works, and who can benefit.
What Is the New "No Tax on Tips" Deduction?
Starting in 2025, qualifying workers can deduct up to $25,000 in cash tips from their taxable income — even if they don’t itemize deductions.
This new deduction is available to employees in occupations where tipping is customary and regular — a list to be published by the IRS. It applies to tips that are:
Voluntarily given by customers
Properly reported on wage statements or IRS Form 4137
Received in cash or through tip-sharing arrangements
Who Can Claim It?
The deduction is designed for employees in traditional tipped industries, but some self-employed service professionals may also qualify — with some important conditions (more below).
To qualify:
The tips must come from an occupation that regularly received tips before 2025
The tips must be voluntary and not subject to negotiation
The taxpayer must include their Social Security number on the return
If married, the taxpayer must file jointly to claim the deduction
How Much Can Be Deducted?
The maximum deduction is $25,000 per year
A phaseout begins at $150,000 of modified adjusted gross income (MAGI), or $300,000 for joint filers
For every $1,000 over the threshold, the deduction is reduced by $100
The deduction cannot exceed actual tip income, and it ends after 2028
Special Rule for Self-Employed Workers
Some service providers (e.g., independent estheticians or mobile hair stylists) may claim this deduction only if their business income — after expenses — exceeds their tip income. This ensures the deduction only applies to genuinely profitable trades or businesses.
New Reporting Requirements for Employers and Payment Platforms
The IRS is introducing updated reporting rules for:
Employers
Gig platforms
Third-party payment processors (like Square or Venmo)
These new rules require a separate accounting of cash tips on income statements and forms like 1099-NEC and 1099-K.
What this means for business owners: If you operate a salon, restaurant, or spa where employees receive tips, your bookkeeping and year-end reporting responsibilities are about to change.
Extension of Tip Credit for Beauty and Spa Services
In a related update, the bill extends the employer tip credit (Section 45B) — previously limited to food and beverage establishments — to include:
Hair care and barbering
Nail care
Esthetics
Body and spa treatments
What this means for salon and spa owners: You may now qualify for a tax credit on certain tip wages — a significant benefit for businesses in the personal care industry.
Implementation Timeline
Effective for tax years starting after December 31, 2024
Applies to tips reported in 2025 through 2028
Reporting requirements begin in 2025, but a grace period allows employers to estimate tip amounts for the 2025 transition
This is one of the most significant tax changes for workers in the service economy in recent history. While it may be politically symbolic, it’s also very real — and for many, potentially worth thousands of dollars in tax savings each year.
Whether you're an employee in a tipped role or a business owner in food, beauty, or hospitality, this provision demands planning, documentation, and possibly updated payroll systems.
Have questions about how to prepare for this new deduction or whether your business qualifies for the tip credit? We’re here to help. Schedule a review before the end of 2024 to make sure you’re ready to take advantage of this opportunity.