No Tax on Tips: IRS Proposal Could Benefit Thousands of Workers

October 13, 2025

The IRS recently proposed a new rule that could significantly reduce the tax burden for millions of tipped workers across the United States. Under this plan, certain employees and self-employed individuals could soon qualify for a “No Tax on Tips” deduction, potentially saving thousands of dollars in annual income tax.

If you rely on tips as part of your income, this proposal could directly impact your take-home pay. Here’s everything you need to know about the details, deadlines, and what steps to take next.

What the IRS Proposal Says

The Internal Revenue Service unveiled its proposed regulation on September 19, 2025, listing 68 occupations that may qualify for a new tax deduction on “qualified tips.” The goal is to ease the tax load on workers in industries where tipping is a core part of income.

If finalized, the rule would apply for tax years 2025 through 2028. Eligible employees and self-employed individuals could deduct up to $25,000 per year in qualified tips from their taxable income.

However, not everyone qualifies; the deduction begins to phase out for those with a modified adjusted gross income (MAGI) above $150,000, or $300,000 for joint filers.

What Counts as “Qualified Tips”

The IRS defines qualified tips as voluntary payments made freely by customers. To qualify:

The tip must be voluntarily given, not negotiated or required.
Tips can be in the form of cash, check, electronic payment, or tokens such as casino chips.
Tips linked to illegal activities, including prostitution or gambling, are excluded.
Any tips paid directly by an employer as part of regular operations also do not count.

This ensures that only genuine, customer-initiated gratuities qualify for the deduction.

Who Qualifies: 8 Occupational Categories

The IRS grouped eligible jobs into eight main categories that commonly receive tip income:

Food & Beverage Service – bartenders, servers, dishwashers, fast food workers
Entertainment & Events – musicians, dancers, DJs, ushers, ticket takers
Hospitality & Guest Services – bellhops, hotel clerks, porters, housekeepers
Home Services & Repair – electricians, plumbers, maintenance workers
Personal Care & Appearance – barbers, hair stylists, massage therapists, beauticians
Recreation & Instruction – tour guides, golf caddies, fitness or dance instructors
Transportation & Delivery – taxi drivers, rideshare drivers, valets, delivery staff
Miscellaneous Services – other occupations where tipping is customary

Each qualifying role will be assigned a three-digit “tipped occupation code” on Form W-2, appearing in Box 14b once implemented.

Important Dates & Deadlines

September 22, 2025 – The proposed regulation was officially published in the Federal Register.
October 23, 2025 – Deadline for public comments. This is the last day individuals, businesses, and organizations can submit feedback on the rule.
Tax Years 2025–2028 – The “No Tax on Tips” deduction would apply if finalized.

These deadlines are crucial for workers and employers who may want to voice support or seek clarification before the rule becomes law.

Why This Matters

For millions of Americans in tipped professions, this proposal could mean thousands in annual tax savings. It would also simplify recordkeeping for certain occupations and make tip income more transparent for both taxpayers and employers.

However, since the rule is still in its proposal stage, it’s essential to stay informed and plan ahead. The final version could include adjustments or changes before taking effect.

What Workers and Employers Should Do Now

Check if your job is listed among the 68 qualifying occupations.
Track your tips accurately to ensure compliance if the rule passes.
Employers should review payroll systems and prepare to add the new Box 14b code on Form W-2.
Submit comments before October 23, 2025, if you want your feedback to help shape the final rule.

Preparation now can prevent confusion and penalties later.