Updates to Tip Income

Tips

Under the Internal Revenue Code, cash tips received by an employee are generally considered taxable income. Employees are required to report their cash tips to their employer so that appropriate payroll taxes can be withheld. Historically, all tip income has been fully taxable.

However, under the One Big Beautiful Bill Act (OBBA), certain individuals who receive qualified cash tips in occupations where tipping is customary may be eligible for a temporary deduction. This deduction is scheduled to expire for taxable years beginning after December 31, 2028.

What Is the Deduction?

Eligible taxpayers may claim a deduction of up to $25,000 per year. The deduction phases out by $100 for every $1,000 of modified adjusted gross income above $150,000 (or $300,000 for married couples filing jointly). Married taxpayers must file jointly to take advantage of this deduction.

Rules

To qualify, tips must be properly reported to the IRS by both the employee and employer. Tips must be voluntary, and only certain service trades or businesses outlined in the Internal Revenue Code are eligible. Additionally, some businesses are exempt from reporting tips and claiming this deduction.

If you have questions about how the One Big Beautiful Bill Act may impact your business or your individual tax situation, contact our tax experts for guidance.