No Federal Tax on Tips: A Major Win for Hospitality Workers
A big change is on the way for America’s hospitality industry. Congress has passed a bill that eliminates federal income tax on tips—a major victory for millions of workers who rely on tips to make a living.
This new law, called the No Tax on Tips Act, is designed to help servers, bartenders, delivery drivers, hotel staff, and many others keep more of the money they earn.
Under the new law:
- Workers can deduct up to $25,000 in reported tip income each year from their federal taxable income.
- The deduction phases out for higher earners (individuals over $150,000, couples over $300,000 in modified AGI).
- It applies to all reported tips—cash, credit card, and those pooled or shared.
- The change starts with the 2025 tax year, so workers will see the benefit when filing taxes in early 2026.
You can read the bill’s text and status on Congress.gov (Senate Bill 129) and House Bill 482.
💡 Why This Matters for Hospitality Workers
Tips aren’t just a bonus—they’re essential income for many in the industry. By removing federal income tax on up to $25,000 of tips, the law puts real money back into workers’ pockets.
Example:
Imagine Alex, a server who earns about $35,000 in tips per year:
- Previously, Alex would pay around $4,200 in federal income tax on those tips (assuming ~12% effective tax rate).
- Under the new law, that entire $25,000 portion is deducted from taxable income, saving Alex thousands each year.
That’s extra money for rent, groceries, bills, or even savings for emergencies.
🧾 Key Details for Workers
✅ Report your tips! This benefit only applies to reported tip income.
✅ Tips must still be included on your W‑2 or 1099 forms to claim the deduction.
✅ State and local income tax may still apply. This change only affects federal income tax.
✅ Social Security and Medicare taxes on tips still apply.
✅ The deduction will be available for the 2025–2028 tax years unless extended.
For more about how it will work, you can see these explainers:
- Congress.gov bill page
- Kiplinger: No Tax on Tips Bill Approved
- Littler: Employer Advisory on No Tax on Tips
📌 Why It Matters to Our Industry
The hospitality industry runs on the dedication of servers, bartenders, and other tipped employees. Their work often involves long hours, variable shifts, and unpredictable income.
This tax change recognizes that reality and provides meaningful relief targeted to the workers who need it most.
At NAHCT, our mission is to support and inform hospitality professionals, employers, and educators. We believe understanding these changes helps the entire industry plan, adapt, and thrive.
We encourage all workers to keep good records of their tips, report them properly, and talk with a tax professional to make the most of this new benefit.
Stay tuned to NAHCT.org for more updates on important legislation, industry news, and resources for hospitality compliance training.
