No Tax on Tips Act: What Tipped Workers Need to Know for 2025
What Tipped Workers Need To Know About the Federal “No Tax On Tips” Act
As part of President Donald Trump’s recently passed “Big Beautiful Bill”, tipped workers will soon be able to exclude tips from their federal taxable income, potentially putting more money in their pockets.
The change, which takes effect in 2025, allows workers to deduct up to $25,000 in tips from taxable income. However, experts caution that while it offers some relief, it doesn’t address the larger issue of low wages in the tipped workforce.
“What is really holding tipped workers back is low wages, not taxes,” said Chris Meyer of the Maryland Center for Economic Policy.
Earlier this year, Maryland lawmakers introduced two bills that would have created a statewide No Tax on Tips Act and raised the minimum wage to $20 by 2028, while eliminating the tip credit that lets employers count tips toward the minimum wage. Both bills died over budget concerns and lack of legislative momentum.
The new federal law applies only to federal income taxes, not Maryland state taxes, although the state is still reviewing possible effects. Tipped workers must still pay Social Security, Medicare, and other payroll taxes on tips.
Workers who regularly receive tips, including servers, bartenders, salon and hotel staff, can take advantage of the deduction, but it phases out for those earning more than $150,000 individually ($300,000 jointly).
Cash and credit card tips both qualify for the deduction.
According to the IRS, more than 105,000 tipped workers in Maryland could see larger federal tax refunds over the next few years.
Jessica Lopez, of the Maryland Association of CPAs, explained how it works:
A single worker earning $20,000, including $15,160 in tips, would have paid about $425 in federal taxes under the old rules. With tips now deductible, that worker wouldn’t owe federal taxes and could qualify for a refund instead.
Savings will vary case by case, so workers should consult a tax professional.
The law is set to expire in 2028, though experts expect it to be renewed.
Workers must still keep daily records of tips, as required by the IRS, and report all tips on their tax returns. Businesses and individuals should track tips carefully in case of an audit.
Some experts warn that higher reported income from keeping more tips could make some workers ineligible for need-based benefits like Medicaid and SNAP, which have strict income limits.
Angelo Greco, of the One Fair Wage Coalition, argues the real solution is raising wages:
“No tax on tips is a great slogan, but it only applies to a few. It might help some workers, but it’s no substitute for fair pay.”
The federal No Tax on Tips Act could mean hundreds, even thousands, of dollars in savings for some tipped workers. But it doesn’t solve deeper challenges facing the industry.
The IRS plans to release more guidance this fall on which workers and industries qualify.
For now, experts recommend tipped workers continue filing taxes as usual, keep meticulous tip records, and consult a tax advisor about how the new law could affect them.
