No Tax on Tips — How the OBBBA Deduction Works
Tipped employees can deduct up to $25,000 of tip income from federal taxes under the One Big Beautiful Bill Act (OBBBA). Here's exactly how it works and what it means for your paycheck.
Who qualifies?
W-2 employees who receive tips in an occupation that customarily and regularly receives tips qualify. This includes servers, bartenders, hotel staff, food delivery workers, salon workers, and other IRS-designated tipped occupations. Self-employed workers in qualifying occupations may also qualify, but their deduction cannot exceed their net income from the business where the tips were earned.
What tips count?
Tips reported on your W-2 in Box 7 count. This includes cash tips, credit card tips, and charged tips. Employer-paid service charges (mandatory gratuity) are wages, not tips, and do not qualify.
The cap and phase-out
The deduction is capped at $25,000 per year. If your modified adjusted gross income (MAGI) exceeds $150,000 (single/$300,000 married), the deduction phases out at 6 cents per dollar over the threshold.
What about FICA?
Social Security (6.2%) and Medicare (1.45%) taxes still apply to all tip income — the OBBBA only affects federal income tax, not FICA. This is the most important thing many calculators hide. Your employer withholds FICA on tips and will continue to do so.
How to claim it
The deduction is taken above-the-line on your federal tax return. Update your W-4 (Line 4b) now to stop overwithholding and get the benefit in every paycheck starting this year.
State tax implications
Most states have not yet conformed to the OBBBA tip deduction, meaning you will still owe state income tax on your tips even if your federal tax is reduced. Check the State Conformity Tracker to see your state's current status.