Alongside the overtime deduction, the One Big Beautiful Bill Act delivered on the second of 2024's campaign promises: an income‑tax deduction for tips. It is a real benefit — and, like the overtime provision, narrower than the headline.
What the bill actually does
New §224 allows an above‑the‑line deduction of up to $25,000 per year in "qualified tips" received in an occupation that customarily and regularly received tips before January 1, 2025. The deduction is available whether the taxpayer itemizes or takes the standard deduction. It runs through December 31, 2028, and then sunsets.
A MAGI phase‑out mirrors the overtime provision: $150,000 single, $300,000 joint, reduced $100 per $1,000 over. High earners who report tips — wine sommeliers at high‑end restaurants, for example — lose the deduction quickly.
Who qualifies
Treasury is tasked with publishing the list of qualifying occupations; until the regulations land, the statute points to the occupations already identified by the Bureau of Labor Statistics as customarily tipped. The clear inclusions are food service, bartenders, taxi and rideshare drivers, hairdressers, barbers, spa workers, valets, and delivery drivers. Lawyers, bankers, and consultants who have moved to gratuity‑style pricing do not qualify.
The tips must be voluntary, paid by the customer, and properly reported to the employer (for employees) or on Form 1040 (for self‑employed workers). Mandatory service charges — the automatic 18% on a table of eight — are not tips for this purpose and remain fully taxable as wages.
What did not change
Three things commonly confused about this provision:
- Payroll taxes still apply. Social Security and Medicare withholding on tips is unchanged. The deduction is federal income tax only.
- State income tax generally still applies. Few states have conformed so far. Tipped workers in high‑tax states keep paying at the state level.
- Withholding tables did not move. The IRS did not update employer withholding for 2025 to reflect the new deduction. Tipped employees will see the benefit at filing — either through a larger refund or a smaller balance due — not in each paycheck.
Planning implications
For restaurant operators, the near‑term issue is tip reporting discipline. The deduction depends on the tip being reported; historically there has been meaningful unreported cash tip activity. Employees who want the deduction now have an affirmative reason to report every dollar. Employers should anticipate higher reported tip totals and corresponding FICA matching costs.
For high‑earning service professionals (celebrity stylists, top‑of‑market sommeliers), the phase‑out does most of the work of excluding them. For the rank and file, the deduction is a meaningful cash benefit — the first real tax break targeted at this category of worker since the 1993 FICA tip credit.
If you own a restaurant, salon, spa, or transportation business, the combination of the tip deduction and the overtime deduction is a real talking point with staff — but only if your payroll system is configured to substantiate both. That work starts before year‑end.