No Tax on Tips: Guide for Employees and Payroll Teams

President Trump’s One Big Beautiful Bill Act (OBBBA) has been a topic of conversation for quite some time across industries of all kinds. For payroll and HR professionals, one of the most commonly discussed inclusions is the “no tax on tips” change.

As of July 4, 2025, the bill was passed and is now signed into law. For taxation on tips, implementation is likely to start January 1, 2026. What does this mean for tipped employees—and for the HR and payroll professionals who manage tips and reporting?

What is the core idea of the “No Tax on Tips” section?

The bill aims to eliminate federal taxes on earned tips, at least through 2028. This means tips earned by servers, bartenders, hair stylists, and more would no longer be subject to federal income tax. (Note: This tax elimination only applies to voluntary tips and does not include mandatory tips like automatically-included gratuity or employer-paid bonuses.)

What employees are impacted by having no taxes on tips?

This tax break will apply to workers who “customarily and regularly” receive tips from their employers’ establishments. This includes anyone in any industry, as long as the tip is voluntary by the patron.

How much tip income can employees deduct?

The best estimate as of now from the grumblings of the administration is that workers can deduct up to $25K worth of tips. This deduction will ultimately hit a limit, though. As of now, that limit seems likely to be $150K.

What taxes are impacted?

• Federal income tax: This is the primary tax the law impacts. Qualified tips will no longer be taxed at the federal level.
• FICA, Social Security, Medicare: This is not yet clear—the bill may or may not remove these. More regulation and clarification will be coming soon.
• Employer taxes: Like FICA, these are also in question (including FUTA and FICA match).
• State taxes: State taxes will not be impacted by the OBBBA unless your state specifically follows federal tax law. Colorado, Illinois, Minnesota, New Mexico, and Utah, for example, automatically conform to federal tax law, so it is possible that they might automatically adopt the “no tax on tips” update. However, it’s important to note that states can still override the auto-adoption with new state-level legislation if they do want to keep taxing tips. States like California, New York, and Pennsylvania often pick and choose which federal tax law elements they follow. More information will follow as states determine their individual courses of action.
• Local taxes: There will likely be few changes to local taxes on tips, but check your localities to be sure!

While the OBBBA and pending federal No Taxes on Tips Act may exempt tips from federal income tax, state taxation rules still apply. Payroll administrators must continue withholding and reporting tip income for state taxes unless their specific state issues formal guidance saying otherwise.

Do employees still report tips?

Yes! Employees will still be responsible for reporting all tip income, even if untaxed. The reasoning behind this is to prevent abuse and to help calculate eligibility for benefits like Social Security, Medicare, and unemployment.

W2s will include total tip income. However, it is not yet clear what the form will include to indicate that income.

Who will benefit from removing taxes on tips?

Employees and Positions

The primary beneficiary of the deduction will be directly tipped employees, although other “departments” within restaurants will likely see this benefit. Depending on how the company is structured, employees such as cooks, porters, and dishwashers could also potentially receive this benefit as well. (Note: “Tipping out” other employees does not count as voluntary tipping for tax purposes. Tipping out is exempt, as the patron did not specifically choose to leave a tip for that employee.)

Outside of restaurants, professions like hair stylists, nail techs, valets, concierges, casino dealers, and golf caddies can all benefit from the new tax exemption. Essentially, this is a benefit for anyone who regularly makes a significant percentage of their income from tips.

Industries

According to the National Restaurant Association, the inclusion of policies that deduct taxes on tips and overtime (another area of focus from the current administration) is favorable overall to the restaurant industry.

As we write this, many details have yet to be solidified. In addition to food service, there will be more overall to benefit from the passing of the bill.

What should tipped workers do now?

At the moment, tipped workers will have to wait a little longer until more guidance from the federal government is available.

More information and items are likely coming, such as updates to the W4 withholdings. Payroll teams and companies will manage these withholdings on employees’ behalf. Alternatively, workers can simply wait for their refund distribution after filing their taxes.

With the law going into effect at the beginning of 2026, these changes will likely be incorporated into the 2025 tax year tax filings.

One key question already popping up is: If I work more than one tipped job, can I deduct my tax on tips for multiple jobs? The answer as of now is that there is not a set number of jobs employees can use for this deduction. However, the overall tax income deduction limit is likely $25,000 per year. This deduction considers only the amount of money earned as a whole for the year as it relates to each specific employee filing taxes.

It is important to note that this exemption only applies to federal income tax. As mentioned above, tipped workers would still likely be subject to state and local (SALT) income and payroll taxes.

What should payroll administrators do to keep compliant?

Fortunately, not much will be different on the payroll administration side of things. But there will be a few key areas to watch for as we gear up for the law taking effect.

• Review Federal withholding settings in your payroll system to exclude qualifying tip income (when OBBBA goes into effect). Be ready to separate voluntary vs. mandatory tips in your reporting (only voluntary tips qualify for the tax exemption).
• Watch for clarification on whether FICA/FUTA still apply to tip income.
• Watch for information about W2 and W3 reporting for tips, and update your documentation accordingly. (This act presumably means a new box or code to distinguish exempt earnings.)
• Confirm tax conformity between your state and federal tax law. If not, you still might need to withhold state income tax on tips.
• Confirm tax laws for your locality, and verify whether local withholding still applies to tipped income.
• Pro Tip: A payroll service provider will be able to handle much of the administrative and educational aspects of the OBBBA “no tax on tips” update!

Conclusion

Tipped workers are a historically underpaid workforce in America. While not perfect, the OBBBA “no tax on tips” measure is a good start to providing them tax relief.

As the new federal exemption on tip taxation moves forward, employers, payroll providers, and tipped employees are in a learning phase. To best prepare for implementation in early 2026, we need to keep a growth mindset and stay current on documentation and evolving compliance requirements.

We will continue to update this post as the government releases more information. In the meantime, we hope the information above was helpful! If you have any questions about specifics, please let us know. If there’s anything Green Payroll can do to help your business streamline this transfer process, contact us today!