Do You Have to Pay Taxes on Tips? Trump Tax Changes

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Traditionally, all tip income was taxable, and workers had to report any cash tips exceeding $20 per month to their employer. But in 2025, the One Big Beautiful Bill introduced temporary exemptions: individuals can deduct up to $25,000 in tips from their income if they meet all the qualifications (though tips will still be subject to Social Security and Medicare plus state and local taxes). Additionally, a portion of overtime pay will be partially deductible as well. These changes, which last through 2028, could bring tax relief, but they also come with new reporting rules.

A financial advisor can help you understand how these changes affect your tax situation and ensure your tip income is handled correctly.

  • Starting in 2025 and lasting through 2028, eligible tipped workers can deduct up to $25,000 in cash tips from federal taxable income, along with up to $12,500 in overtime pay (up to $25,000 for joint filers), under President Trump’s “One Big Beautiful Bill.”
  • These exemptions gradually phase out for individual taxpayers earning over $150,000 or joint filers over $300,000, reducing the benefit for higher-income earners.
  • Even with the exemption, all tip income must still be reported to employers and the IRS. In 2025, employers must begin itemizing qualified tips and overtime on W‑2 forms.
  • This tax relief applies only through 2028, unless Congress acts to extend the provision; after that, full taxation of tips resumes.

How Tips Have Been Taxed Historically

Before 2025, anyone earning tips had to report them as taxable income, regardless of whether they were cash or credit-card tips. According to IRS guidelines, employees must report tips of $20 or more in a month to their employer, who then includes the amount in income for federal taxes, Social Security and Medicare. 

Failing to report tips accurately could result in penalties and audits. Some industries even implemented tip pooling, further complicating reporting. Even though many workers earn “under-reported” tips, the IRS has historically enforced tip-reporting rules strictly, making tip taxation a long-standing concern.