NEWS
The Internal Revenue Service is preparing detailed guidance for how workers should report and claim the new tips deduction created under the One Big Beautiful Bill Act. Beginning in tax year 2025, eligible taxpayers will be able to reduce taxable income by excluding qualified tips on their tax return, subject to occupation rules developed by the U.S. Treasury Department.
The deduction applies to qualified tips that meet federal definitions, including voluntary payments made by customers in cash, by credit card, through electronic payments, or through a tip-sharing system. Workers must ensure these amounts are properly reported on Form W-2, Form 1099, or Form 4137 if they had unreported tips. Under Public Law 119-21, the Treasury tipped occupation code system will determine whether occupations such as wait staff, bartenders, and specific self-employed individuals qualify.
The Internal Revenue Service has emphasized that no tax on tips will apply for amounts excluded under the deduction. However, workers must still report all tip income for employment tax and FICA taxes. The Fair Labor Standards Act continues to govern rules on minimum wage, tip credit, and tip pooling arrangements, which remain separate from the federal deduction.
The deduction begins to phase out for taxpayers with incomes above the IRS thresholds. Single filers see reductions starting at $150,000, while joint filers begin the phase-out at $300,000. Workers must file a joint return to claim the deduction if married. A valid Social Security number is required on Form 1040, and incorrect information may delay claims during the tax filing season.
Employers are preparing to update payroll systems to distinguish between qualified tips and payments excluded under the law, including service charges that continue to be treated as wages. IRS Notice 2025-69 outlines transition relief for employers adapting to the new reporting structure. Many businesses that rely on tips, including restaurants, sports and entertainment venues, and gig economy companies, are reviewing their systems to ensure accurate reporting through point-of-sale devices and third-party settlement organizations.
Workers who receive overtime pay or qualified overtime compensation must also track tip income separately. Although casino chips and other non-cash gratuities may appear in some industries, only properly documented amounts count toward the deduction. Employers may also issue additional records such as Form 4070, Schedule 1A, or Box 14 entries, depending on payroll practices.
Digital content creators, delivery workers, rideshare drivers, and others who rely on electronic payments may fall into unique reporting categories. Some third-party platforms already issue Form 1099, but workers may require clarification on employment and labor law interactions, including tip credit rate rules or how federal budget law interacts with section 224 of the statute. The Treasury Department may release updates through an online portal later in 2025.
The deduction is expected to benefit a wide range of workers who rely on customer tips, particularly wait staff and those in the sports and entertainment industries. Eligible taxpayers may see reduced taxable income, potentially lowering liability even after applying the standard deduction. The NTOT deduction created by Section 224 may also interact with future provisions, such as the Working Families Tax Cut Act, although additional clarification is expected.
Workers using payroll systems connected to a credit card company or modern digital tools may find that electronic payments make recordkeeping easier. However, taxpayers with incomes near the phase-out thresholds should monitor IRS updates to avoid misreporting.
Tax professionals recommend reviewing employer records to confirm that electronic payments match reported amounts and checking updated IRS guidance under Public Law 119-21. Workers should also verify that reporting systems have captured all qualified tips and that their Social Security information is accurate before claiming the new tax deduction.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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