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The federal government’s “One Big Beautiful Bill” was signed into law in July 2025. With it came big changes for payroll administrators. Among them is the “no tax on tips” provision, which is more complex than its straightforward name implies.
Businesses without an in-house payroll and tax compliance expert may find the new law confusing. For multi-state employers, who may already be juggling varying state and local tip laws, it could be downright overwhelming.
Here’s what small business owners need to know:
The “no tax on tips” provision lets qualifying workers deduct from their federal taxable income up to $25,000 of tips received during normal employment. The government will still take out taxes for Medicare or Social Security.
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The IRS will release a complete list of qualifying occupations by Oct. 2, 2025. It likely will include servers, bartenders, hair stylists and others who regularly receive voluntary tips from customers or through tip sharing. In 2023, the most recent year for which data is available, an estimated 4 million people worked in tipped occupations.
There are already some caveats for those in qualifying occupations. Self-employed workers in a Specified Service Trade or Business (SSTB) or those employed by an SSTB, for example, are not eligible for the deduction. The deduction also phases out for taxpayers with modified adjusted gross income exceeding $150,000, or $300,000 for joint filers.
Yes. Existing tip-reporting rules don’t disappear. Workers must continue to tell their employers about all tips exceeding $20/month. Tips should not automatically be deducted from employees’ taxable income but should instead be reported on Form W-2 or 1099 so workers can claim the deduction come tax time.
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Eligible workers can claim the deduction on their 2025-2028 income tax returns.
With employees potentially earning more in tips, some businesses may consider adjusting hourly wages. Payroll administrators should be aware that state minimum wage laws still apply, especially when calculating the standard minimum wage after tips.
Federal tax law changes can bring multifaceted challenges in payroll management and compliance – and missing the mark can mean costly mistakes. That’s where Axcet can help.
As a certified PEO, Axcet HR Solutions has spent nearly 40 years helping small and mid-sized companies with comprehensive payroll and tax administration needs. Axcet offers payroll processing, payroll tax and payroll compliance services so you can focus on growing your business instead of deciphering new tax codes. Schedule a consultation >>
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