During the 2024 election campaign, both presidential candidates Donald Trump and Kamala Harris proposed excluding tips from income taxes. I argued a year ago that doing this would create more problems than benefits. It will further complicate the tax laws, incentivize businesses to convert to a tip-based compensation structure, deprive a subset of people of future Social Security benefits, and exacerbate tip culture.
When Trump regained the presidency, he included a “No Tax On Tips” provision on his One Big Beautiful Bill. So let’s examine what the bill actually says and analyze whether it addresses the problems I stated above.
The “No Tax On Tips” Law. From 2025 until 2028, employees and self-employed individuals may deduct qualified tips received in occupations that customarily and regularly receive tips. The IRS must publish a list of occupations that customarily and regularly receives tips by October 2, 2025.
A qualified tip is a voluntary, nonnegotiated payment from the customer with no consequence for nonpayment.
The maximum annual deduction is $25,000. For self-employed individuals, the deduction may not exceed the individual’s net income from the trade or business in which the tips were earned. In other words, the deduction cannot be used to create a net operating loss (or negative income) which can be carried forward to offset future income. The deduction phases out for taxpayers with modified adjusted gross income over $150,000, or over $300,000 for joint filers.
There are some limitations. Self-employed individuals in a Specified Service Trade or Business (SSTB) are not eligible for the deduction. A business is considered an SSTB if the principal asset of that business is the reputation or skill of its owners and employees. The treasury regulations list examples of SSTBs which include services in the fields of health, law (emphasis added), accounting, actuarial science, performing arts (remember this), consulting, athletics, financial services, and brokerage services.
Also, individuals must have Social Security numbers to claim the deductions. A person who does not have a SSN but instead has an Individual Taxpayer Identification Number (ITIN) cannot use the deduction.
Married taxpayers cannot file separately.
Analysis. First, it is important to note that this a deduction from taxable income which will reduce federal income tax. This deduction will not reduce payroll or self-employment taxes which means it will not negatively affect Social Security. Also, the deduction will not reduce adjusted gross income which is used to determine things like income-based student loan payments.
The tax savings will vary based on the individual. A taxpayer who takes the full $25,000 deduction and does not exceed the income maximum of $150,000 (24% tax bracket) will save $6,000 in taxes. On the other hand, a part-time employee who earns less than the standard deduction amount of $15,750 will get no tax savings.
In light of the limitations imposed, people receiving tips in cash will not be inclined to report it, especially if they have reached the annual maximum or their income has made them ineligible.
Next, let’s look at the people who can take advantage of this deduction. While the IRS has not yet released its official list of trades or businesses that customarily receives tips, the Treasury Department released a preliminary list in August.
For the most part, the list is not surprising. In fact, in certain industries such as food service, the occupation list is very broad and includes cooks, food preparation workers, and dishwashers.
The list also included occupations which may or may not customarily receive tips. This includes — among others — electricians, plumbers, and locksmiths. For those who do not receive tips, they might try adjust their business practices so they can reclassify a portion of their income as tips.
Another unexpected eligible occupation is the digital content creator. This includes online video creators, social media influencers, and podcasters. For these people, the IRS will need to look at what these people are doing. For example, are they giving legal advice on their podcast? Or are they dancing or performing only for their fans? If so, they may be engaging in an SSTB.
The list included some occupations that could be considered SSTBs and thus ineligible to take the tip deduction. These include musicians, singers, and entertainers which are specifically listed in the treasury regulations. When there is a conflict, what is stated in the treasury regulations generally trump IRS notices, revenue rulings, and memorandums. The IRS will need to clarify this conflict when it releases its final list of eligible occupations.
Next, as mentioned, the customer has to give the tip voluntarily. This means that giving a “suggested amount” — usually given so the customer does not have to calculate the amount themselves — is still considered voluntary. But there are certain situations where a gratuity is required. Usually this is the case where a large party is served. But some restaurants have begun to charge service fees in lieu of tips, usually for tip-sharing purposes. Since these tips are required and not voluntary, that could mean that this tip income is nondeductible.
Lastly, denying the deduction for those who do not have SSNs is meant to target undocumented immigrants. Since this is not a tax increase, they will continue to file tax returns and pay taxes and will likely continue their way of life. Also, an argument could be made that they are paying more than their fair share since they are paying more taxes than a similarly situated U.S. citizen or permanent resident.
In sum, the new law isn’t likely to change much. The IRS will need to clarify potential conflicts in its upcoming guidance. But it appears that those with higher incomes will get the most tax savings.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
The post An Analysis Of The ‘No Tax On Tips’ Law: Who Will Benefit From This? appeared first on Above the Law.
During the 2024 election campaign, both presidential candidates Donald Trump and Kamala Harris proposed excluding tips from income taxes. I argued a year ago that doing this would create more problems than benefits. It will further complicate the tax laws, incentivize businesses to convert to a tip-based compensation structure, deprive a subset of people of future Social Security benefits, and exacerbate tip culture.
When Trump regained the presidency, he included a “No Tax On Tips” provision on his One Big Beautiful Bill. So let’s examine what the bill actually says and analyze whether it addresses the problems I stated above.
The “No Tax On Tips” Law. From 2025 until 2028, employees and self-employed individuals may deduct qualified tips received in occupations that customarily and regularly receive tips. The IRS must publish a list of occupations that customarily and regularly receives tips by October 2, 2025.
A qualified tip is a voluntary, nonnegotiated payment from the customer with no consequence for nonpayment.
The maximum annual deduction is $25,000. For self-employed individuals, the deduction may not exceed the individual’s net income from the trade or business in which the tips were earned. In other words, the deduction cannot be used to create a net operating loss (or negative income) which can be carried forward to offset future income. The deduction phases out for taxpayers with modified adjusted gross income over $150,000, or over $300,000 for joint filers.
There are some limitations. Self-employed individuals in a Specified Service Trade or Business (SSTB) are not eligible for the deduction. A business is considered an SSTB if the principal asset of that business is the reputation or skill of its owners and employees. The treasury regulations list examples of SSTBs which include services in the fields of health, law (emphasis added), accounting, actuarial science, performing arts (remember this), consulting, athletics, financial services, and brokerage services.
Also, individuals must have Social Security numbers to claim the deductions. A person who does not have a SSN but instead has an Individual Taxpayer Identification Number (ITIN) cannot use the deduction.
Married taxpayers cannot file separately.
Analysis. First, it is important to note that this a deduction from taxable income which will reduce federal income tax. This deduction will not reduce payroll or self-employment taxes which means it will not negatively affect Social Security. Also, the deduction will not reduce adjusted gross income which is used to determine things like income-based student loan payments.
The tax savings will vary based on the individual. A taxpayer who takes the full $25,000 deduction and does not exceed the income maximum of $150,000 (24% tax bracket) will save $6,000 in taxes. On the other hand, a part-time employee who earns less than the standard deduction amount of $15,750 will get no tax savings.
In light of the limitations imposed, people receiving tips in cash will not be inclined to report it, especially if they have reached the annual maximum or their income has made them ineligible.
Next, let’s look at the people who can take advantage of this deduction. While the IRS has not yet released its official list of trades or businesses that customarily receives tips, the Treasury Department released a preliminary list in August.
For the most part, the list is not surprising. In fact, in certain industries such as food service, the occupation list is very broad and includes cooks, food preparation workers, and dishwashers.
The list also included occupations which may or may not customarily receive tips. This includes — among others — electricians, plumbers, and locksmiths. For those who do not receive tips, they might try adjust their business practices so they can reclassify a portion of their income as tips.
Another unexpected eligible occupation is the digital content creator. This includes online video creators, social media influencers, and podcasters. For these people, the IRS will need to look at what these people are doing. For example, are they giving legal advice on their podcast? Or are they dancing or performing only for their fans? If so, they may be engaging in an SSTB.
The list included some occupations that could be considered SSTBs and thus ineligible to take the tip deduction. These include musicians, singers, and entertainers which are specifically listed in the treasury regulations. When there is a conflict, what is stated in the treasury regulations generally trump IRS notices, revenue rulings, and memorandums. The IRS will need to clarify this conflict when it releases its final list of eligible occupations.
Next, as mentioned, the customer has to give the tip voluntarily. This means that giving a “suggested amount” — usually given so the customer does not have to calculate the amount themselves — is still considered voluntary. But there are certain situations where a gratuity is required. Usually this is the case where a large party is served. But some restaurants have begun to charge service fees in lieu of tips, usually for tip-sharing purposes. Since these tips are required and not voluntary, that could mean that this tip income is nondeductible.
Lastly, denying the deduction for those who do not have SSNs is meant to target undocumented immigrants. Since this is not a tax increase, they will continue to file tax returns and pay taxes and will likely continue their way of life. Also, an argument could be made that they are paying more than their fair share since they are paying more taxes than a similarly situated U.S. citizen or permanent resident.
In sum, the new law isn’t likely to change much. The IRS will need to clarify potential conflicts in its upcoming guidance. But it appears that those with higher incomes will get the most tax savings.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
