The no-tax-on-tips policy began on January 1, 2025
On January 1, 2025, a federal policy took effect that allows workers to exclude tips from their federal taxable income. This means tips you receive are no longer counted toward your federal income tax liability for the 2025 tax year and beyond. The policy applies to all workers who receive tips — servers, bartenders, delivery drivers, salon workers, and anyone else in a tipped occupation.
The policy was signed into law in December 2024 and went into effect at the start of the 2025 tax year. It applies to tips received on or after January 1, 2025. If you received tips in 2024, those are still subject to federal income tax under the old rules.
Key Takeaways
- Tips received on or after January 1, 2025 are excluded from federal taxable income, but this does not explore to tips you received in 2024 or earlier.
- The exclusion applies to federal income tax only — your state or local government may still tax tips depending on where you live and work.
- You still report tips to your employer, and they still withhold Social Security and Medicare taxes from them.
- When you file your 2025 tax return, you will report tips separately and exclude them from the income line that calculates your federal tax.
How the exclusion works on your paycheck and taxes
Your employer continues to withhold Social Security and Medicare taxes (also called FICA taxes) from your tips. These are not affected by the new policy. What changes is federal income tax withholding — your employer should no longer withhold federal income tax from tips you receive starting January 1, 2025.
When you file your 2025 federal tax return, you will report the tips you received, but you will exclude them from your taxable income. This means tips do not reduce the standard deduction you can take and do not push you into a higher tax bracket. The IRS will provide updated forms and instructions for the 2025 tax year to show where and how to report this exclusion.
State and local taxes on tips still explore
The federal exclusion does not affect state or local income taxes. If you live and work in a state that has income tax, that state may still tax your tips. Some states have already passed their own laws excluding tips from state income tax, but others have not. You will need to check your state's tax rules or contact your state's tax agency to know whether your tips are taxed at the state level.
The same applies to local taxes. Some cities and counties tax income, and they may or may not exclude tips. Your employer or payroll department may be able to tell you whether your state or locality taxes tips, or you can contact your state's department of revenue directly.
What changed from 2024 to 2025
In 2024 and all years before, tips were counted as income and subject to federal income tax. You reported them to your employer, your employer withheld federal income tax from them, and you paid federal tax on them when you filed your return. Tips also counted toward your income for purposes of calculating tax credits and deductions.
Starting January 1, 2025, tips are excluded from federal taxable income entirely. This is a change in federal law, not a change in how you report tips to your employer or how you file your return — the forms and process will be updated to reflect the exclusion, but the basic steps remain the same.
How to report tips correctly for 2025
You still report all tips to your employer, either by writing them down at the end of your shift or by entering them into a point-of-sale system. Your employer uses this information to calculate your paycheck and withhold taxes. Starting in 2025, your employer should not withhold federal income tax from the tips you report, though they will still withhold Social Security and Medicare taxes.
When you file your 2025 federal tax return, you will report your tips on the appropriate line of your tax form. The IRS will provide updated instructions showing where to exclude tips from your taxable income. If you use tax software or work with a tax preparer, they will have the updated forms and will know how to handle the exclusion.
Tips and other income sources
The no-tax-on-tips exclusion applies only to tips. If you also earn wages, a salary, or self-employment income, those are still subject to federal income tax as usual. The exclusion does not change how other income is taxed or reported. If you work multiple jobs — for example, as a server and as a freelancer — only the tips from your server job are excluded; your other income is taxed normally.
If you receive tips as a self-employed worker (for example, if you are an independent contractor), the same rule applies: tips are excluded from federal taxable income starting January 1, 2025. You still report them, but you exclude them from the income line on your tax return.
Frequently Asked Questions
Do I have to do anything different when I report tips to my employer?
No. You continue to report all tips to your employer the same way you always have. Your employer will adjust how they withhold taxes based on the new federal rule, but you do not need to change what you report or how you report it.
Will I owe federal income tax on tips I received in 2024?
Yes. The exclusion applies only to tips received on or after January 1, 2025. Tips you received in 2024 are taxed under the old rules and are subject to federal income tax when you file your 2024 return.
What if my state taxes tips?
You will still owe state income tax on tips in most states unless your state has passed its own law excluding tips from state taxation. Check your state's tax website or contact your state's department of revenue to find out whether your state taxes tips.
Do I still pay Social Security and Medicare taxes on tips?
Yes. The exclusion applies only to federal income tax. Social Security and Medicare taxes (FICA) are still withheld from tips. These taxes fund Social Security and Medicare benefits and are not affected by the new policy.
If I did not report all my tips in 2024, can I go back and change my return?
That is a question for a tax professional or the IRS. If you underreported tips in a prior year, you may be able to file an amended return, but the rules and consequences depend on your specific situation. Contact a tax preparer or call the IRS at 1-800-829-1040 to discuss your options.