If you work in a service industry where tips form a major part of your income, President Donald Trump’s campaign promise to end taxes on tips probably piqued your interest. Though he’s only been in office for a few months, the president is already trying to make good on this promise via a new Republican-backed tax bill currently in the House of Representatives.
The 389-page bill covers a variety of tax reforms, and it specifically calls out no taxes on tips. While it’s not clear that this bill will pass or that all its provisions will remain as they appear now, it gives us insight into what this change would look like.
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How no taxes on tips would work
The bill lays out the basic guidelines for how this rule change would work in practice. First, it would only be available for “qualified tips.” These are cash tips (or equivalents, like a credit card tip or mobile payment service payments) given in occupations that customarily receive tips. These payments must be voluntary, with the amount determined by the person giving you the tip. Plus, you must not be a highly compensated employee to take advantage of this deduction.
If you’re self-employed, you may still take advantage of this new rule. However, your business must show a profit to do this. You cannot create a loss by deducting tips under this change.
You’d be eligible for this deduction whether you claim the standard deduction or itemize. You must include your Social Security number on your tax return, and if you’re married, you must include your spouse’s Social Security number as well. You must also report your tips to the IRS. They’ll likely appear on your W-2 or 1099, so you shouldn’t have to worry about this.
Some details still need to be worked out
While the Republican-backed bill outlines the basics, some details still need to be hammered out. For one, the current bill only calls for this rule to remain in place through 2028. Deciding whether it would be permanent would likely come later after the government’s had a year or two to see how it works in practice.
A big potential issue is employers trying to give their employees extra salary as tips in an attempt to avoid taxes on that money. The bill says the Secretary of the Treasury “shall prescribe such regulations or other guidance as may be necessary to prevent reclassification of income as qualified tips.” We don’t know what those regulations might look like yet.
The Secretary of the Treasury is also supposed to create a list of occupations that have customarily received tips prior to Dec. 31, 2024. You must be in one of these industries to be eligible to deduct your tips. We know from the current bill that this will include businesses that engage in “the providing, delivering, or serving of food or beverages,” as well as beauty service businesses, like barbering, hair styling, nail care, and spa treatments. But it’s possible others could get added to this list as well.
It’s important to remember that there are still some hurdles to ending taxes on tips. Assuming the bill passes the House, it will still have to make its way to the Senate, where it could be subject to substantial revisions. So while tax-free tips are a possibility, it’s not a done deal yet.
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