OBBB Creates New Deduction for Qualified Tips Through 2028
The One Big Beautiful Bill (OBBB) Act introduces a new federal tax provision that may affect businesses with tipped employees. Beginning in 2025, up to $25,000 in qualified tips per year may be excluded from federal taxable income through 2028. The deduction applies to occupations where tipping has long been customary and regular, including roles such as waitstaff, bartenders, and hairdressers.
Qualified tips include cash or charged amounts reported on Form W-2, Form 1099-NEC, or Form 1099-K. Form 4137 may also be used to report unreported tip income for payroll tax purposes. The deduction phases out when modified adjusted gross income exceeds $150,000 for individuals and $300,000 for joint filers. The reduction is calculated as $100 for each $1,000 above those thresholds.
Eligibility is limited to workers in occupations where tipping was customary and regular as of December 31, 2024. Workers in specified service businesses—such as accounting, health care, and actuarial sciences—are excluded. Only voluntary tips—not negotiated service charges—are eligible, and wages cannot be reclassified to qualify.
The deduction applies only to federal income tax. Tips remain subject to payroll taxes, including Social Security and Medicare, and states are not required to adopt the rule. The deduction reduces taxable income but does not lower adjusted gross income (AGI), which means it will not affect other tax benefits tied to AGI thresholds.
AAFCPAs monitors federal tax provisions, including new deductions under OBBB, and advises businesses on compliance and planning related to tipped employees. Our team works with clients to evaluate eligibility, assess tax implications, and integrate new rules into broader payroll and tax strategies. We will continue to follow developments and provide updates as additional guidance is released.
How We Help
AAFCPAs helps individuals and businesses navigate new tax provisions, including deductions for qualified tips under the One Big Beautiful Bill Act. Our team combines deep technical expertise with proactive planning to ensure clients remain in compliance while optimizing their federal and state tax positions.
We work closely with clients to assess eligibility, quantify benefits, and integrate new rules into broader tax strategies. Whether advising individuals, closely held businesses, or nonprofits, our professionals provide guidance tailored to each client’s financial goals, keeping strategies clear, actionable, and aligned with current law.
These insights were contributed by Traci Grady, EA, Manager.
Questions? Reach out to our author directly or your AAFCPAs partner.
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