The federal government did not eliminate tax on tips, but a temporary policy in 2024 created confusion
In September 2024, President Biden announced a policy that would allow workers to exclude tips from federal income tax through the end of that year. This was not a permanent law change—it was a temporary executive action that applied only to 2024 tax returns filed in 2025. The policy expired on December 31, 2024. Tips remain taxable income under federal law, and workers are required to report them to the IRS.
The 2024 tip exclusion was limited to workers earning under $32,500 per year (single filers) or $65,000 (married filing jointly). It applied only to tips received directly from customers, not credit card processing fees or tips split with other staff. The IRS did not automatically process this exclusion—workers had to claim it themselves when filing their 2024 return, or their employers had to adjust withholding during the year if they chose to participate.
Key Takeaways
- The 2024 tip exclusion from federal income tax expired on December 31, 2024, and tips are taxable income again under current federal law.
- The temporary policy only applied to workers earning below $32,500 (single) or $65,000 (married filing jointly) and covered only direct customer tips.
- Workers who received tips in 2024 and want to claim the exclusion must report it on their 2024 tax return when they file in 2025.
- State and local taxes on tips were not affected by the federal policy and remain in effect in most states.
How the 2024 tip exclusion actually worked
The policy allowed workers to exclude tips from their federal taxable income if they met the income threshold. This meant that tips did not count toward the income used to calculate federal income tax, though they still had to be reported to the IRS on your tax return. You could not straightforward ignore tips—you had to document them and claim the exclusion when filing.
If your employer participated in the program, they could adjust your tax withholding during 2024 so that less money was taken from your paycheck. If your employer did not participate, you could still claim the exclusion when you filed your return in 2025, but you would not see the benefit until you received a refund. Many employers did not participate because the policy was temporary and the administrative burden was unclear.
State and local taxes on tips did not change
The federal exclusion did not affect state or local income taxes. Workers in states with income tax still owed state tax on tips received in 2024 and owe it now. Some states, including New York and California, tax tips at the same rate as wages. A few states have no income tax at all, so residents paid neither federal nor state tax on tips under the 2024 policy.
Self-employed workers and gig workers who receive tips (such as delivery drivers or rideshare drivers) were not covered by the 2024 exclusion. Self-employment tax on tips still applied, and it still applies now.
Tips are taxable income under current federal law
As of January 1, 2025, tips are fully taxable under federal law. Workers must report all tips to their employer and to the IRS. The IRS expects tips to be reported on Form 1040 (the main individual income tax return) and may be included in your W-2 if you are an employee.
Employers are required to withhold federal income tax, Social Security tax, and Medicare tax on reported tips. If you do not report tips to your employer, you are still required to report them on your tax return. Unreported tips can result in penalties and interest if the IRS discovers them during an audit.
What to do if you received tips in 2024
If you earned tips in 2024 and your income was below the threshold ($32,500 single, $65,000 married filing jointly), you can claim the exclusion on your 2024 tax return. You will need to report the total tips you received and then subtract them as an exclusion. This reduces your federal taxable income for that year only.
Keep records of all tips you received in 2024—including cash tips, credit card tips, and tips split with coworkers. Your employer's records and your own notes will help you calculate the correct amount to claim. If you are unsure whether you meet the income threshold, calculate your total 2024 income (wages plus tips) before deciding whether to claim the exclusion.
Why the policy was temporary
The 2024 tip exclusion was announced as a campaign policy and was implemented through executive action rather than legislation passed by Congress. Executive actions are temporary by nature and do not create permanent changes to tax law. Congress would have needed to pass a law to make the exclusion permanent, and that did not happen.
The policy was controversial among tax experts and policymakers. Some argued it was poorly targeted because it benefited only lower-income workers and created administrative confusion. Others noted that it did not address the underlying issue of whether tips should be taxed at all. Without congressional action, the exclusion expired as scheduled.
Frequently Asked Questions
Do I have to report tips to my employer?
Yes. Federal law requires you to report all tips to your employer, including cash tips. Your employer uses this information to calculate payroll taxes and to report tips to the IRS on your W-2. Failure to report tips can result in penalties.
Can I claim the 2024 tip exclusion if I file my taxes late?
Yes, you can claim the exclusion on your 2024 tax return whenever you file it, as long as you file for the 2024 tax year. The exclusion itself does not expire—only the ability to receive tips under the policy ended on December 31, 2024. File your return as soon as you can to receive any refund you are owed.
What if my employer withheld taxes on tips in 2024 even though I may have access to for the exclusion?
Claim the exclusion on your 2024 return. When you file, the exclusion will reduce your taxable income, and you should receive a refund for the taxes your employer withheld on those tips. Keep your pay stubs as proof of what was withheld.
Are tips taxed differently if I work for a restaurant versus a delivery service?
Tips from customers at a restaurant are reported to your employer and taxed as wages. Tips from delivery or rideshare customers are typically considered self-employment income if you are an independent contractor, and you owe self-employment tax on them. The 2024 exclusion did not explore to self-employed workers.
Will there be another tip exclusion in 2025?
There is no current federal policy excluding tips from taxation in 2025. Tips are taxable income under existing law. Congress would need to pass new legislation to create another exclusion, and no such bill has been introduced.