The No Tax on Tips Act
An interactive guide to understanding the 2025 tax deduction for tipped workers.
The "No Tax on Tips Act" introduces a temporary but significant change to the federal tax code for millions of service industry workers, effective for tax years 2025-2028. This interactive guide breaks down what the law does, who it affects, and how to navigate its complex benefits and drawbacks.
Up to $25,000
Annual deduction for qualified tip income from federal income tax.
Income Tax Only
The law does NOT reduce liability for Social Security, Medicare, or State taxes.
2025-2028
This is a temporary tax provision scheduled to expire after the 2028 tax year.
Tax Impact Simulator
See how the deduction could affect your federal income tax. Adjust the sliders to match your situation and see a personalized comparison. This tool provides an estimate for illustrative purposes only.
BEFORE the Act
$5,178.50
Estimated Fed. Income Tax
AFTER the Act
$2,161.50
Estimated Fed. Income Tax
Estimated Federal Income Tax Savings
$3,017.00
Unchanged FICA Taxes (Social Security/Medicare)
$4,590.00
Calculated on full tip income.
The Big Catch: EITC & Unintended Consequences
The law's biggest flaw is how it interacts with benefits for low-income workers. Because the deduction lowers your Adjusted Gross Income (AGI), it can paradoxically reduce or eliminate your eligibility for credits like the Earned Income Tax Credit (EITC).
How It Happens
The EITC is designed to help low-to-moderate income workers. The credit amount first increases with income (phase-in), stays flat, and then decreases as income rises further (phase-out).
The Problem: If your income is in the EITC "phase-in" range, the new tip deduction lowers your AGI, which can cause you to receive a smaller EITC. In some cases, the amount of credit lost can be more than the tax saved from the deduction, making you financially worse off.
Illustrative EITC Curve
What This Means For You
The law creates new responsibilities and opportunities. Find guidance tailored to your role below.
✔️ Prioritize Meticulous Recordkeeping
The single most important step is to keep a detailed, daily log of all tips received (cash and electronic). IRS Publication 1244 provides a template. This documentation is your only defense in an audit.
⚠️ Model Your EITC Situation
Before filing, use tax software or a tax professional to see how the deduction affects your AGI and EITC. Do not assume the deduction automatically helps you, especially if you have low income and qualifying children.
💰 Plan for FICA and State Taxes
Your tips are NOT fully tax-free. You will still pay the 7.65% FICA tax (Social Security & Medicare) on every dollar of reported tips, plus any applicable state and local income taxes.
🏢 Engage Your Payroll Provider Immediately
A new W-2 reporting requirement mandates that you separately track and report "qualified tips." Contact your payroll service now to ensure their systems will be compliant for the 2025 tax filing season.
🚫 Strictly Avoid Wage Recharacterization
Attempting to reclassify regular wages as tips to help employees claim the deduction is considered tax evasion by the IRS. This carries severe penalties and is a major audit risk.
✨ Leverage the Expanded §45B Credit
The law permanently expands the FICA tip credit to include beauty service establishments (hair, nails, spa, etc.). If you own a qualifying business, consult a tax advisor to start claiming this valuable credit.
