The new “no tax on tips” law has been welcomed by millions of Americans in service and hospitality jobs. But there is a catch that many high earners will not like. The IRS has confirmed that if you make more than $25,000 in tips, the amount above that threshold will remain fully taxable under the new rules.
This means that while many middle and lower income workers may see some relief, higher earners in industries where tipping is significant will still face federal income tax on a large share of their tip income. Let us break down what this actually means for you.
Are tips still taxable under the new law
The short answer is yes. Tips are still considered taxable income by the IRS. The change that came with the “No Tax on Tips Act” is not a full tax break, but rather a deduction.
Here is what you need to know:
- Workers can deduct up to $25,000 of their tip income when filing taxes for 2025 through 2028.
- The deduction applies only if your total income is $150,000 or less as a single filer, or $300,000 or less if you file jointly with your spouse.
- Any tips above the $25,000 cap are treated like normal wages and are taxed as part of your income.
So, while you may be able to keep more of your money, the IRS is very clear that tips beyond that limit remain fully taxable.
Who benefits the most from the $25,000 tip deduction
The biggest winners are workers in industries where tips make up a large part of income but do not usually exceed the $25,000 cap. These include:
- Servers and bartenders
- Hair stylists, barbers, and nail technicians
- Hospitality workers such as bellhops and hotel clerks
- Rideshare and delivery drivers
For these workers, the deduction could mean thousands of dollars in tax savings each year. However, for professionals in higher-end industries who often receive much larger tips, the benefit is limited.
Why high earners will not see much relief
If your total tips go far beyond $25,000, you will likely still face a significant tax bill. For example:
- A high-end sommelier who earns $40,000 in tips will only be able to deduct $25,000. The remaining $15,000 is taxed as regular income.
- A luxury event planner or entertainer who collects $60,000 in tips will pay taxes on $35,000 of that amount.
In short, the IRS has drawn a line that ensures only modest and middle-level earners enjoy the full relief, while wealthier workers still contribute more in federal taxes.
How the IRS is enforcing the rule
The IRS has stressed that all tips, whether cash, credit card, or digital, must still be reported. You are legally required to:
- Report tips of $20 or more per month to your employer.
- Keep a personal record of tips received, even if they were in cash.
- File the correct amount of tip income on your tax return.
Employers will continue to include tips in your W-2, and payroll systems will withhold Social Security and Medicare taxes from that income. The only change is that you may now deduct up to $25,000 from your taxable income if you qualify.
What this means for your 2025 tax return
When you file your taxes in early 2026 for income earned in 2025, here is what you can expect:
- You can claim the tip deduction if you meet the income limits.
- If you earn more than $25,000 in tips, you will pay taxes on everything above that amount.
- The IRS has clarified that the deduction is temporary, running only from 2025 to 2028. After that, Congress would need to extend it for it to continue.
This means you should start planning now. If your tip income is high, you may want to set aside more money throughout the year to cover your tax bill.
Common questions about tip taxation
Are cash tips treated differently from credit card tips?
No. The IRS treats all tips the same, regardless of how they are paid.
Do I still owe Social Security and Medicare taxes on tips?
Yes. Even if you claim the $25,000 deduction, you will still pay payroll taxes on the full amount of tips earned.
Can high earners apply for an exemption?
No. The cap is firm, and tips over $25,000 remain fully taxable without exception.
