IRS Insider: The Truth About the “No Tax on Tips” Law — What Still Counts, What’s New, and How to Report It Right

Lauren Twitchell
Oct 30, 2025
4 min read

When Congress passed the No Tax on Tips provision earlier this year, half the internet cheered and the other half panicked.

Food vendors, service workers, and market sellers all started asking the same thing:

“Wait—does this mean I don’t have to report my tips anymore?”

Let’s clear that up right now.

As someone who spent years inside the IRS, here’s the bottom line:

Tips still have to be reported.

What’s new is a deduction that reduces how much of those tips you pay federal income tax on.

You still need to track your tips, record them in your books, and include them on your tax return. But now, for the first time, some of that income may qualify for a deduction that lightens your tax bill.

Let’s unpack what this means—and what it doesn’t.

1. What the New “No Tax on Tips” Law Actually Does

The No Tax on Tips provision, passed in 2025, doesn’t erase your reporting requirements. It introduces a new federal income tax deduction—up to $25,000 per year—for people who earn “qualified tips.”

Here’s how it works:

You still report all tips (cash, card, digital).
You calculate your total tip income for the year.
You may deduct up to $25,000 of those tips when figuring your federal income tax liability.

Think of it as a break, not a free pass.

2. Who Qualifies for the Deduction

As of now, the deduction applies to people working in jobs or businesses that “traditionally and customarily received tips” before December 31, 2024.”

That includes:

✅ Food vendors, servers, bartenders, coffee cart owners, and other hospitality workers.

✅ Small business owners and independent contractors who operate in tip-based environments.

But there are a few important limitations:

The deduction phases out for higher earners (starts at $150,000 single / $300,000 married).
You must accurately report your tips—cash and digital—to claim the deduction.
It applies only to federal income tax, not Social Security or Medicare tax.

That last point is critical: FICA still applies.

If you’re self-employed, your reported tip income is still subject to self-employment tax (SECA).

3. What Hasn’t Changed

Here’s what’s exactly the same as before:

💵 Tips are still taxable income. You must include them on your tax return.
🧾 Recordkeeping rules haven’t changed. You still need a paper or digital trail showing what you earned.
🏦 Deposits still matter. The IRS still uses bank and processor records to match income totals.
⚖️ Auditors still look for missing cash income. The new deduction doesn’t protect you from underreporting penalties.

So if you were hoping this meant “no paperwork”—sorry.You still have to show your math.

4. What “Qualified Tips” Actually Mean

The IRS hasn’t finalized all guidance yet, but based on the text of the bill and Treasury summaries, qualified tips are:

Voluntary payments made by customers,
Given directly or indirectly to the worker or business, and
Customary to the trade or occupation.

That means your coffee cart tip jar, your Square “add a tip” line, or cash tips handed over at a festival—all qualify.

Not included:

Mandatory service charges (those are considered business income).
Tips that aren’t reported at all (you can’t deduct what you didn’t claim).

So, in plain English:

If you track and report your tips properly, you may now deduct up to $25,000 of them from your federal taxable income.

5. Why You Still Need to Track Everything

Here’s where many small businesses trip up:The IRS isn’t going to “guess” your tip totals for you.

To take the deduction, you must be able to show records that match your return.

The simplest method? A daily or event-based tip log.

Date	Card Tips	Cash Tips	Paid Out to Staff	Net Tips Kept
10/26/25	$42	$85	$25	$102

That one log does everything you need:

✅ Tracks total income.

✅ Documents payouts to helpers.

✅ Creates proof for both tax reporting and deductions.

Keep your logs digital or paper—just make them consistent.

6. How to Report Tips Correctly in 2025

If you’re self-employed (food truck, market booth, or cart owner):

Report all tips as part of gross receipts on your Schedule C.
You’ll still owe self-employment tax on that income.
You can claim the new “Qualified Tip Income Deduction” on your 1040 when you file.

If you’re an employee receiving tips:

Report cash tips to your employer by the 10th of each month (same as before).
They’ll include them on your W-2.
You’ll claim the new deduction on your individual tax return.

7. What Not to Do

Here’s what not to do under the new law:

🚫 Don’t stop reporting cash tips.

The IRS can still see income discrepancies using 1099-K forms, POS data, and bank deposits.

🚫 Don’t try to double dip.

You can’t deduct unreported tips, and you can’t claim more than $25,000.

🚫 Don’t treat this like free money.

It’s a deduction, not a refund. If your tax rate is 12%, a $10,000 deduction saves you roughly $1,200—not $10,000.

8. The Smart Play for Food Vendors and Solopreneurs

If you’re running a small operation—coffee cart, lemonade stand, barbecue trailer—this law can actually work for you if you stay organized.

Here’s how to make it simple:

Track daily tips (cash + digital).
Deposit cash tips weekly to your business account.
Reconcile your POS reports monthly to verify totals.
Tag tips separately in your books—don’t mix with sales.
Keep your logs for at least three years.

Clean records = smooth reporting + an easy deduction at tax time.

9. What the IRS Still Looks For

Even with this new deduction, IRS examiners are trained to review:

Whether gross receipts match 1099-K totals,
If your reported income is consistent with industry averages,
And if your recordkeeping is complete.

So your goal is simple: make sure your numbers make sense.

When they do, auditors move on.When they don’t, you get letters.

10. The Bigger Picture: A Win for Compliance

From an insider’s perspective, this law isn’t about giving away free income—it’s about encouraging honest reporting.

By allowing a deduction for properly reported tips, the IRS and Congress are trying to make it easier for small businesses to do the right thing and keep more of their money.

It rewards accuracy, not avoidance.

The “No Tax on Tips” law doesn’t erase your responsibilities—it rewards your organization.

If you track, report, and document your tips correctly, you’ll get a real tax break without risking an audit.

👉 Keep your logs.

👉 Deposit your cash.

👉 Take the deduction when it’s allowed.

No judgment. No fluff. Just clean, compliant books.