Tipped Workers and the Big Beautiful Bill: New Breaks

Congress passed the One Big Beautiful Bill Act in July 2025, introducing a groundbreaking tax deduction for service workers. The law created a “no tax on tips” benefit, allowing deductions of up to $25,000 through 2028. Millions of waiters, bartenders, delivery drivers, and hospitality employees will directly benefit from this targeted federal tax relief. Eligibility rules and Internal Revenue Service definitions determine who qualifies, making proper documentation and compliance essential for claiming this deduction.

What Is the Deduction under the One Big Beautiful Bill

The One Big Beautiful Bill Act introduced a new tax deduction allowing workers to exclude up to $25,000 in qualified tips. This deduction applies to cash tips, credit card tips, and tips received through mobile payment application systems or electronic settlement. The tax on tips provision applies to tax years 2025 through 2028, offering relief to tipped workers in the service industry. While the deduction lowers federal income tax, it does not reduce payroll taxes paid for Social Security or Medicare.

The new tax deduction phases out for joint filers with a modified adjusted gross income of $300,000 or more, adjusted annually for inflation. Each tax return, not each individual, is limited, making proper filing crucial under the Internal Revenue Service's proposed regulations. Workers in specified service trade occupations, such as food preparation workers and tour guides, regularly receive tips that may qualify. The Treasury Department and Federal Register provide additional guidance and request comments on specific jobs that are eligible for this tax break.

Who Qualifies under the Big Beautiful Bill Act

The Big Beautiful Bill Act provides a groundbreaking tax break for tipped workers, but only certain occupations qualify for the deduction.

• Food & Beverage: The law covers servers, bartenders, bakers, dishwashers, and cooks who regularly receive tips as part of their income.
  
  
• Personal Appearance & Wellness: Eligible roles include hairstylists, barbers, massage therapists, tattoo artists, and other professionals providing personal appearance services.
  
  
• Entertainment & Events: Casino dealers, musicians, comedians, and content creators qualify as tipped workers under the new law’s provisions.
  
  
• Transportation & Delivery: Taxi drivers, rideshare operators, and valet attendants are recognized as occupations that customarily and regularly receive tips.
  
  
• Home Services: Landscapers, plumbers, electricians, and cleaners qualify when tips are part of their income for eligible service industries.

To qualify, workers must customarily and regularly receive tips, ensuring the deduction targets service occupations most impacted by tipping income.

What Counts as Qualified Tips According to the Internal Revenue Service

The Internal Revenue Service defines qualified tips as cash tips, credit card tips, debit card payments, and mobile payment application transfers. Casino chips, gift cards, and voluntary cash tips received also count when paid voluntarily by a customer. Tips must be given freely, not as mandatory service charges, and must be reported accurately as taxable income.

Under the Big Beautiful Bill Act, the new law excludes cryptocurrency, digital assets, and event tickets from tax on tips. IRS proposed regulations provide that tips received through a tip pool or voluntary tip-sharing arrangement remain valid. To qualify for the tax deduction, tipped workers must customarily and regularly receive tips and report them on a tax return.

The SSTB Exception and Proposed Regulations

The SSTB exception under the Big Beautiful Bill Act prevents specific professional service industries from qualifying for the new tax deduction. Law, accounting, consulting, healthcare, and the performing arts fall under specified service trade categories that are excluded from tax on tips and benefits. A bartender at a wedding event may qualify because the service industry regularly receives tips for food and beverage services. However, a comedian performing at the same event is not eligible because the IRS considers performing arts an excluded SSTB activity.

IRS proposed regulations provide additional guidance that clarifies which jobs qualify under tipped occupations and which occupations remain excluded. These regulations outline how the Internal Revenue Service applies definitions of service trade categories to ensure consistent enforcement of these definitions. Guidance also stresses that tipped workers must customarily and regularly receive tips to count them as qualified tips for deduction. This approach balances fairness by extending benefits to hospitality and service workers, while excluding high-income professionals in specified service trades.

Timeline and Compliance with the One Big Beautiful Bill

The One Big Beautiful Bill introduced a strict compliance timeline for the new tax on tip deductions, requiring workers and employers to act quickly.

• Retroactive Application: The deduction takes effect retroactively as of January 2025, enabling tipped workers to adjust their federal income tax filings accordingly.
  
  
• Transition Relief: The Internal Revenue Service offers transition relief during the first year, easing reporting requirements for employees in tipped occupations.
  
  
• Tip Tracking: Workers must carefully record all qualified tips, including both cash and credit card tips, to remain eligible for deductions.
  
  
• Employer Responsibility: Employers must update their payroll systems and reporting methods to ensure compliance with federal tax laws and withholding phases.
  
  
• Expiration Date: The new tax deduction sunsets in 2028 unless Congress extends provisions of the Beautiful Bill beyond that date.

This timeline underscores the importance for both tipped workers and employers to remain compliant with federal regulations and maximize their tax benefits.

Looking Ahead at the Future of the Big Beautiful Bill

More than 10 million tax returns are projected to claim tips under the Big Beautiful Bill in 2026. This surge reflects how many tipped workers customarily and regularly received tips in previous tax years across multiple service industries. Lawmakers continue debating whether the tax on tips deduction should become a permanent tax break beyond its scheduled expiration. Congress will revisit the Beautiful Bill before 2028 to decide whether to extend, modify, or allow the provision to sunset.