Q&A: Unpacking Elements of the ‘No Tax on Tips’ Provision

Since being included in the final version of H.R. 1 (otherwise known as the One Big Beautiful Bill Act), signed by President Donald Trump on July 4, the “no tax on tips” provision has been a hot issue for many U.S. employers and their total rewards professionals.

Just type “no tax on tips” into your LinkedIn search bar and prepare to continuously scroll through the results — questions, answers, opinion pieces, legal advisements, polls, charts, graphs, etc.

While a headline-grabber across industries, this is particularly and primarily impactful for companies involved with:

• Beverage and food services
• Entertainment and events
• Hospitality and guest services
• Home services
• Personal services
• Personal appearance and wellness
• Recreation and instruction
• Transportation and delivery

The conversation (on social media and perhaps, based on your industry, in corporate/department/team meetings) will undoubtedly pick up speed now that the Department of the Treasury, on Tuesday, Sept. 2, made public a “preliminary list” of occupations that, based on their historical tipped status, would be eligible for the tax-savings benefit. (The list will soon take the form of a final “proposed list” that will be published in the Federal Register, and be open to public commentary, before heading toward codification in Treasury Department and Internal Revenue Service [IRS] rules.)

This article serves as a question-and-answer document on elements of the provision. Government resources, including those found on the Treasury, IRS and Department of Labor (DOL) websites (e.g., the DOL’s pages devoted to “Wages and the Fair Labor Standards Act”), also will prove helpful as you and your organization discuss, create and mobilize related strategies.

Where is the “no tax on tips” provision included in H.R. 1? It appears as Section 70201 in the 870-page government document, starting on Page 247 and concluding on Page 257.

What is the general provision regarding “no tax on tips”? The document states: “There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual pursuant to Section 6041(d)(3), 6041A(e)(3), 6050W(f)(2) or 6051(a)(18) [of the Internal Revenue Code], or reported by the taxpayer on [IRS] Form 4137 (or successor).”

When does the provision apply? The changes are effective starting with the 2025 tax year and expire after the 2028 tax year.

Who does this apply to? The statute spells out, “There shall be taken into account only tips received from customers or clients in connection with the following services: (A) The providing, delivering or serving of food or beverages for consumption, if the tipping of employees delivering or serving food or beverages by customers is customary; [and,] (B) The providing of any of the following services to a customer or client, if the tipping of employees providing such services is customary: (i) Barbering and hair care; (ii) nail care; (iii) esthetics; (iv) body and spa treatments.” The Treasury’s Sept. 2 list provides greater clarity (and a first pass) on the covered occupations.

What does this provision apply toward? “Qualified tips” are defined as for-service remuneration that is “paid voluntarily without any consequence in the event of nonpayment,” not the subject of negotiation, and determined by the customer/payer. While “cash tips” are the most common means toward deduction application, H.R. 1 defines that term to include:

• Tips “paid in cash or charged” plus “tips received under any tip-sharing arrangement”; and,
• Tangible “non-cash” tips (e.g., concert tickets, a gift basket), listed in dollar-value equivalent.

Section 3 — most prominently, Section 3(m) — of the FLSA outlines the use of tips by employers as a form of compensation.

What are the specific deductions and their limits? Eligible U.S. workers can deduct up to $25,000 in tips (H.R. 1 does not call out any increase in the case of a joint return) from their annually income subject to federal income tax. The amount is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 in the case of a joint return).

What are the deduction caveats? The deduction is available to nonitemizers, meaning such individuals (as individual income tax filers) can claim it in addition to the standard deduction. This deduction has no effect on Social Security and Medicare taxes. Also, the deduction is not allowed unless the tipped worker includes their social security number on their tax return.

What are the business requirements? For eligible tipped employees, employers must include the worker’s dollar amount for cash and non-cash tips, and the worker’s occupation, on Form W-2 (or otherwise report it on Form 4137). For tipped contractors that receive a Form 1099, employers must separately report the worker’s applicable tips and occupation on that tax form. For the 2025 tax year, the law advises, “Persons required to file returns or statements under section 6051(a)(19), 6041(a) or 6041(d)(4) of the Internal Revenue Code of 1986 (as amended by this section) may approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the [treasury] secretary.”

Check Out Our Full H.R. 1 Coverage

H.R. 1 has brought plenty of changes to organizations and their total rewards pros, and Workspan Daily is on top of it.

Access additional Workspan Daily articles related to H.R. 1:

• The Facts on Tax: Breaking Down the H.R. 1 Overtime, Tips Provisions
• What Made the List? All the Job Titles Eligible for ‘No Tax on Tips’
• Charting the Changes: 2026 Benefit Plan Limitations
• How H.R. 1 Changes Your Section 127 and 529 Education Programs
• Prepare Your Systems for H.R. 1-Related Reporting and Administration
• New U.S. Law’s Family-Focused Savings Benefit: Will It Catch On?
• The Impact of the H.R. 1 Law on the Telehealth Safe Harbor

Access additional Workspan Daily Plus+ articles related to H.R 1:

• Checklist for Total Rewards to Be Compliant with H.R. 1 Provisions
• The Ripple Effect: 529 Plans as a Catalyst for Financial Stability
• What Are TR Pros’ Options for Paid Care Leave Design

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Total Rewards