Sign up to receive accounting tips, videos, news and webinar info before anyone else
Mailing Address
21750 Hardy Oak Blvd
Ste 104 PMB 63328
San Antonio, TX 78258-4946
(760) 697-1033
Disclaimer: This legislation is not yet law. While bipartisan support is strong, final provisions may change. Businesses and employees should stay informed and consult a tax professional before making changes.
If you earn or manage tip income, there may be some good news coming. As of mid-2025, two versions of legislation are working their way through Congress that aim to make a portion or even all of tip income exempt from federal income tax. The Senate has already passed the bill, while the proposal has bipartisan support in the House and is expected to move forward.
If passed, these new tip laws would impact how businesses report tip income, how employees file their taxes, and how self-employed workers track their earnings. Here is what you need to know now and how to prepare ahead of the 2026 tax year.
Key Facts
- Effective: Tax years 2025–2028
- Tip deduction: Up to $25,000
- Overtime deduction: $12,500 (or $25,000 jointly)
- Other updates: New IRS forms and rules starting in 2026
What the New Law on Tips Would Change
Right now, tip income is treated just like regular wages for tax purposes. Employees pay federal income tax, Social Security, and Medicare on those earnings, and employers must report them accordingly. The new legislation would create an exception, allowing qualifying workers to exclude some or all tip income from their federal income tax, though Social Security and Medicare taxes would still apply.
The change would apply whether someone uses the standard deduction or itemizes, and it would primarily benefit workers in customer-facing service roles who fall under a certain income threshold.
House vs. Senate Versions of the Tip Law
At the time of publication, the Senate bill has already passed, while a House bill that includes similar language and is part of the broader 2025 budget plan is still on the table.
The version of the No Tax on Tips Act that became law includes a $25,000 tip income deduction and a $12,500 deduction for overtime (or $25,000 jointly). All provisions expire after 2028 unless extended by Congress.
What Business Owners Need to Prepare For
Disclaimer: Compliance recommendations are preliminary, since this is PENDING legislation.
If either version passes, businesses in food, beverage, and beauty services will need to start preparing for new tip reporting requirements. Ensuring compliance with updated documentation and payroll rules will be key as these changes roll out. Here’s what to keep in mind:
- Expanded Tip Credit: Both versions extend the employer Social Security tip tax credit to beauty and wellness businesses, not just restaurants.
- New Reporting Requirements: Businesses will need to track tip income with greater precision, especially under the House version. That includes W-2s, 1099s, and settlement statements. Employers should be prepared for new W-2 fields, tip tracking rules, and IRS updates effective in the 2026 tax season.
- Payroll Adjustments: Talk to your payroll provider early. You may need to update how tip income is classified and reported starting in 2026.
- Overtime Impacts: If the House bill passes, businesses may see changes in how overtime pay is incentivized and documented for tax purposes.
What Tipped Employees Should Know
If this legislation passes, it could lead to a larger tax refund at the end of the year. While your regular paycheck will likely stay the same (unless you file a new W-4 after the IRS updates its withholding tables in 2026), the total amount you owe when filing could be lower. That means you could get more back come tax time.
The impact depends on how much you earn. Those in higher tax brackets could see a bigger benefit, while lower-income workers may notice a smaller change. You may also need to be more diligent about tracking your tip income. The House version includes stricter documentation rules, so keeping good records now is a smart move.
What Freelancers and Self-Employed Workers Should Know
Independent contractors and self-employed professionals may also qualify for the tip income deduction, but the rules are more complex. The House version includes tighter restrictions on which types of service work are eligible, and some freelancers may be left out.
Even if you do qualify, the deduction could be limited to the amount of profit left after business expenses. If your net income is low, the benefit might not be significant. It will be important to separate your tip income from other revenue sources and maintain detailed records to ensure you meet all reporting requirements.
What Happens Next and How to Plan Ahead
With the Senate bill already passed and the House proposal gaining bipartisan traction, changes to tip reporting laws are likely on the horizon for 2026. While the final legislation may still shift, preparing early can help businesses remain compliant and reduce stress when new rules take effect.
In the meantime:
- Start reviewing how your business tracks tips
- Discuss upcoming changes with your payroll or HR software provider
- Talk to your accountant or outsourced finance team about how this could affect your reporting and deductions
Looking Ahead
Whether you’re running a business or earning your income through tips, the proposed changes could affect how you plan, report, and manage your finances. While nothing is set in stone yet, the momentum behind this legislation means it is worth paying attention to now. Being proactive could save you time, stress, and money once the new laws take effect.
FAQs About the New Tip Law and What It Means for You
What is the No Tax on Tips Act?
It’s a proposed federal law that would allow some or all tip income to be excluded from federal income tax for eligible workers.
Are tips still subject to Social Security and Medicare taxes?
Yes, both the House and Senate versions still apply FICA taxes to tip income, even if it is exempt from federal income tax.
Does this affect all tipped workers?
Not necessarily. The House version of the new tip law includes restrictions based on job type, income level, and documentation. The Senate version is broader.
Will I get a bigger paycheck if this passes?
No, withholding will likely stay the same, but your tax refund could increase because less of your income would be taxed.
What does this mean for payroll and accounting systems?
Employers may need to update how they track and report tip and overtime income to remain compliant with new rules. Disclaimer: Compliance recommendations are preliminary, since this is PENDING legislation.
When would this take effect?
The changes would apply to tax years starting in 2026, and all provisions expire after 2028 unless extended by Congress.
Read More >>>
Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
