If you earn tips as part of your regular income, there’s a new tax rule coming that could make a real difference in your take-home pay. Beginning in 2025, qualifying workers in industries where tips are regular and customary may be able to exclude up to $25,000 in tips from taxable income each year.
This new “No Tax on Tips” provision is part of recent tax legislation designed to provide relief to service-based industries. Here’s what you need to know.
Who Qualifies for the No Tax on Tips Rule?
This benefit applies to employees in businesses where tipping is a normal and expected part of income. Think of servers, bartenders, hairstylists, and other hospitality workers.
To qualify:
- Tips must be customary for the industry.
- The deduction is above the line, meaning it reduces your adjusted gross income (AGI).
- The benefit phases out starting at $150,000 for individuals or $300,000 for married couples filing jointly.
How It Works for Employers
Employers will be allowed to use a reasonable method to estimate 2025 tips. This provides flexibility while ensuring compliance with IRS reporting requirements.
This rule will be temporary, applying only for tax years 2025 through 2028.
Why It Matters
This change could help millions of workers keep more of their hard-earned money — but as always, understanding the rules is key. Not all tip income qualifies, and incorrect reporting could still lead to penalties.
Stay Informed and Empowered
I just released a YouTube Short breaking down what this new rule means and how to plan for it before 2025 begins.
👉 Watch here: https://youtube.com/shorts/edWqajRtvGs?si=vlj4mjg_a1WPbK6N
And if you want to see how financially savvy you are, take my Financial Literacy Quiz. It’s a quick and fun way to measure your money knowledge — and learn something new along the way.
👉 Take the quiz: https://go.gundersonsbookkeeping.com/financialliteracyquiz
Final Thoughts
Tax laws are constantly changing, and it pays to stay ahead. Whether you earn tips, own a business, or manage employees who do, understanding how this new rule fits into your overall tax strategy can help you save money and plan smarter.
At Gundersons CFO & Bookkeeping, we help small business owners and individuals make informed financial decisions that build long-term stability and freedom.
Learn more at www.gundersonsbookkeeping.com