OBBBA: What We Know About the New Tip Deductions

The One Big Beautiful Bill Act (OBBBA) introduced a brand-new deduction for self-employed and employee tips — but the details are still fuzzy. The IRS has promised lists of qualifying jobs and clear guidance for self-employed individuals and employers on how to report employee tips, but those instructions haven’t been released yet.

In the meantime, here’s what we do know so far:

Key Details About the Tip Deduction

• Temporary Provision – Available only through the 2028 tax year.

• Retroactive Start – Effective back to January 1, 2025, which may require payroll adjustments.

• Deduction Cap – Employees may deduct up to $25,000 in qualified tips.

• Income Phase-Out – Deduction shrinks once income exceeds:

• $150,000 for individuals

• $300,000 for joint filers
  For every $1,000 above these limits, the deduction is reduced by $100.

• Self-Employed Workers – Must still pay Social Security, Medicare, and state/local taxes on tip income but could be exempt from Federal income tax.

Why This Matters

• Employees: If tips make up a large part of your income, this could be a valuable tax break.

• Employers: Payroll adjustments may be required once official rules are finalized.

• Self-Employed: This deduction doesn’t erase payroll taxes — plan accordingly.

Practical Next Steps (Until IRS Guidance Arrives)

✅ Employees

• Track daily tips (cash + credit).

• Save paystubs and any tip records.

• Talk with your tax preparer about eligibility.

✅ Employers

• Flag 2025 payrolls for possible revisions.

• Notify your payroll provider of potential changes.

• Stay alert for new IRS reporting requirements.

✅ Self-Employed

• Keep tip income separate in your records.

• Budget for Social Security, Medicare, and state/local taxes.

• Consider quarterly estimated tax payments.

Final Thoughts

The new tip deduction under the OBBBA has potential benefits, but the lack of clear IRS guidance makes things tricky for now. We’ll continue monitoring developments closely and will update you as soon as more details are available.

👉 Have questions about how this may affect your 2025 taxes? Contact our office today — we’re here to help you stay ahead of the changes.