Millions of American workers in restaurants, salons, hotels, and other tipped jobs could soon see a major change in how their earnings are taxed. The Internal Revenue Service (IRS) has released a draft W-2 form for 2026 that includes a new section reflecting President Donald Trump’s “No Tax on Tips” policy.
The tax break, part of Trump’s “One Big Beautiful Bill”, lets eligible workers deduct up to $25,000 in tips each year from 2025 through 2028. Both Trump and his Democratic opponent Kamala Harris campaigned on ending taxes on tips, and the measure gained bipartisan support during the 2024 election.
How the new deduction works
Right now, any worker who earns at least $20 a month in tips has to report those tips to the IRS — and pay taxes on them if their income is high enough. Federal law also allows employers to pay as little as $2.13 an hour in direct wages, as long as tips push the total pay up to at least $7.25, the federal minimum wage.
Starting with tax year 2025, workers who are in jobs that “customarily and regularly receive tips” as of Dec. 31, 2024, will be able to claim the new deduction. However, the full benefit won’t apply to everyone. For those making $150,000 or more, the deduction will be reduced and eventually phased out.
According to The Budget Lab, the policy may not affect every tipped worker. Around 37% of workers in tipped jobs don’t pay income tax at all because their total earnings are too low.
What it means for employers
The IRS draft W-2 form includes two new reporting areas for businesses with tipped employees:
- The code “TP” is used to report an employee’s “qualified tips.”
- A separate box is provided for entering a “tipped occupation code.”
Employers will have to figure out which of their workers qualify, and the IRS will release an official list of covered occupations by Oct. 2. While servers, bartenders, and hotel bell staff are almost certain to be included, it’s unclear whether jobs with mandatory service charges or automatic gratuities will qualify.
The IRS has promised “transition relief” to help employers and workers adjust to the new reporting requirements. Guidance will also explain how to calculate “qualified tips” and whether all forms of tips—cash, cards, or pools — will count toward the deduction.
More tax changes are coming
The “No Tax on Tips” clause isn’t the only new feature in the draft W-2 form. Other parts of the tax and budget bill will also change how income gets reported:
- Overtime deduction: Some workers will be eligible for a new tax break on overtime pay. Employers will need to start reporting this separately.
- “Trump accounts” for families: Beginning in 2025, employers will have the option to contribute to special accounts for employees’ children. These contributions will also appear on workers’ W-2s.
Bottom line
For millions of tipped workers, this change could mean thousands of dollars back in their pockets each year. But businesses will need to keep careful records and follow the IRS’s guidance once it’s finalised.
The IRS will release a full list of qualifying jobs — and detailed instructions for employers — in early October. Until then, both workers and managers should remain vigilant for updates to ensure they fully capitalise on this unique bipartisan tax break.
Starting next year, if you earn tips, you may be able to keep more of them. And this time, it’s not too good to be true — it’s written right on the W-2.
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