The “One Big Beautiful Bill” (OBBB), signed into law on July 4, 2025, represents the most sweeping tax reform since the Tax Cuts and Jobs Act (TCJA). While the legislation spans hundreds of pages, individual taxpayers and business owners need to be aware of the key changes to employee tips.

The OBBB creates a temporary deduction for qualified cash tips which have historically been fully taxable.  Effective 2025 through 2028, individuals who receive qualified cash tips in occupations where tipping was customary prior to January 1, 2025, may be eligible to claim the deduction.  The Treasury Secretary and IRS are responsible for deciding which workers can use the deduction and have 90 days from when the law was signed to publish the of list “customarily tipped” occupations.

Taxpayers may deduct up to $25,000 per year from their gross income, meaning the taxpayer does not have to itemize to claim the deduction.  The deduction phases out by $100 for every $1,000 of modified adjusted gross income (MAGI) above $150,000 (or $300,000 for joint filers).  The income limits are subject to annual inflation.

For example, a single filer with a MAGI of $170,000 would see their deduction reduced by $2,000.  

What Employers Need to Know:

• In order for tips to qualify for the deduction, employers are required to report total tips on the Form W-2 along with the occupation of the person receiving the tips. Employers must still report tips on the quarterly 941 filings.
• Tips are still subject to FICA taxes, meaning social security and Medicare taxes.
• Service charges such as fixed automatic gratuity for larger parties at restaurants, are not tips.
• The FICA tip credit is expanded to include beauty service businesses where tipping is customary. 

Contact your YHB advisor today to discuss how these changes can impact you.