As the 2026 tax season heats up, millions of service industry workers—from bartenders in Nevada to servers in Georgia—are finally seeing the promise of the “One Big Beautiful Bill” (OBBB) in action.
Yes, the “No Tax on Tips” provision is law for your 2025 return filed right now.
Bottom Line Up Front (BLUF):
You CAN write off up to $25,000 of qualified tip income from your federal income tax.
However, social media is getting the “How” completely wrong. If you simply leave your tips off your return, you will trigger an automatic audit. You have to report them first to deduct them later.
The Confusion: Income Tax vs. Payroll Tax
Here is the nuance that TikTok influencers are missing: The law exempts you from Federal Income Tax, but NOT the taxes that fund your retirement.
Tax Breakdown Table: What You Actually Pay
Use this chart to understand exactly where your money goes under the new 2025 rules.
| Tax Type | Old Rule (2024) | New OBBB Rule (2025) | Status |
| Federal Income Tax | 10% – 22% (Taxable) | 0% (Tax-Free) | ✅ SAVED |
| Social Security Tax | 6.2% | 6.2% | ❌ Still Pay |
| Medicare Tax | 1.45% | 1.45% | ❌ Still Pay |
| State Income Tax | Varies by State | Varies (Most states still tax it) | ⚠️ Check State |
The Trap: You still owe 7.65% (FICA) on every dollar of tips. If you report $0 tips to “save money,” the IRS computers will flag you for skipping these mandatory Social Security payments.
The Real Rules: How to Claim It Correctly
Do not “hide” your tips. That is tax evasion. Instead, follow the “Report & Deduct” method authorized by the IRS.
- Report It All: Ensure all your cash and credit tips are reported to your employer and appear in Box 1 (Wages) and Box 7 (Social Security Tips) of your W-2.
- The Deduction: On your Form 1040, you will enter your total tips. Then, on Schedule 1, you will claim the “Qualified Tip Income Deduction” (up to $25,000).
- This removes the money from your taxable income legally.
Reporting Thresholds (The $20 Rule)
If you earn $20 or more in tips in any single month, you must report them to your employer.
- Risk: If you fail to report cash tips to your boss, they won’t appear on your W-2. To claim the OBBB deduction on “unreported tips,” you have to file Form 4137, which is a massive audit flag.
What About “Allocated Tips”? (Box 8)
Check Box 8 of your W-2.
If there is a number there, your employer “assigned” you extra income because you reported less than 8% of your sales.
- The Rule: The IRS assumes this is income. You must add Box 8 to your wages AND pay the Social Security tax on it.
- The Good News: You can still apply the OBBB deduction to allocated tips if you can prove you actually received them.
Scam Warning: “Ghost Preparers”
Be wary of tax preparers promising to get you a refund of your Social Security taxes on tips. The OBBB law did not remove the requirement to pay into Social Security. Any preparer claiming otherwise is likely filing a fraudulent return in your name.
Disclaimer: This article reflects OBBB tax laws for the 2025 tax year filed in early 2026. Always verify details at IRS.gov.
Evan Cole Editor-in-Chief | Breaking News & Public Policy
“From Washington to Wall Street, and Main Street to Hollywood—Evan Cole connects the dots.”
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