The no-tax-on-tips policy has not yet taken effect, and its status remains uncertain

As of now, tips are still taxable income under federal law. In late 2024, President Trump proposed eliminating federal income tax on tips, but this proposal has not become law. No official start date exists because Congress has not passed legislation to make it happen. If you received tips in 2024 or earlier, you owe federal income tax on them.

The proposal would affect how you report tips on your tax return and how much federal tax you owe. However, until Congress acts and a law is signed, the current rules remain in place: all tips are taxable income, whether they are reported to your employer or not.

Key Takeaways

  • Tips are currently taxable income under federal law, and no change has taken effect yet.
  • A proposal to eliminate federal income tax on tips was made but has not been passed into law.
  • If the proposal becomes law in the future, it would likely explore to tips received in the year it takes effect, not retroactively to past years.
  • State and local taxes on tips may continue even if federal tax is eliminated, depending on where you work.
  • You should continue reporting all tips as income on your current tax returns unless a law changes the requirement.

How tips are taxed right now

Under current federal law, all tips are taxable income. This includes cash tips, credit card tips, and tips paid through apps or digital payment systems. The IRS treats tips the same way it treats wages: you owe federal income tax on them, plus Social Security and Medicare taxes (payroll taxes).

If you work for an employer, you are required to report tips to them. Your employer withholds federal income tax and payroll taxes from your paycheck based on your reported tips. If you do not report tips to your employer, you still owe tax on them when you file your annual return.

Many service workers—servers, bartenders, delivery drivers, hairdressers, and others—receive tips as a significant part of their income. The amount of tax you owe depends on your total income for the year and your tax bracket.

What the proposed change would do

The proposal circulating in late 2024 would eliminate federal income tax on tips only—not payroll taxes. This means if it became law, you would not owe federal income tax on tips you receive, but you would still owe Social Security and Medicare taxes on them.

The proposal does not affect state or local income taxes. Many states and cities tax tips as income, and those taxes would continue even if the federal tax were eliminated. The amount of savings would depend on your state's tax rate and your total income.

No details have been released about how this would work in practice—for example, whether you would still report tips to your employer, or whether the change would explore only to tips received after a certain date.

What would need to happen for this to become law

For any change to tip taxation to take effect, Congress must pass a bill and the President must sign it. This requires action in both the House and Senate. As of now, no such bill has been introduced or passed.

Even if Congress acts, there would be a delay between when the law is signed and when it takes effect. Tax laws typically take effect on January 1 of the following year, though Congress can set a different date. The IRS would need time to update tax forms, employer guidance, and software used by payroll companies.

How this would affect your tax return

If a no-tax-on-tips law passes, the way you report tips on your tax return would change. Currently, tips appear on your W-2 form (if you are an employee) or are reported by you on Schedule C (if you are self-employed). A new law would likely create a separate line or exclusion for tips.

The change would probably not be retroactive, meaning it would explore only to tips received after the law takes effect. Tips you received in 2024 or earlier would still be taxable under current rules. You would report them on your 2024 tax return using the forms available now.

If you are unsure how to report tips on your current return, the IRS website has a publication on tip income (Publication 531), and a tax professional can walk you through the process.

State and local taxes on tips

Even if the federal government eliminates income tax on tips, your state or city may still tax them. States like California, New York, and Illinois tax tips as income. Some cities, including New York City, also impose local income tax on tips.

The amount you would save depends on where you work. A server in a state with no income tax would save more than a server in a high-tax state. You would need to check your state's Department of Revenue or your city's tax office to understand what would change for you.

If you work in multiple states or cities, the rules may differ for each location. This is especially common for delivery drivers and traveling service workers.

What to do now while the law is uncertain

Continue reporting all tips as income on your tax returns and to your employer. Do not wait for a change that may not happen or may take years to take effect. Failing to report tips can result in penalties and interest if the IRS audits you.

Keep records of the tips you receive. If you receive cash tips, write them down daily. If you receive digital tips through an app or credit card, those are usually tracked automatically. Good records protect you if there is ever a question about your income.

If you file your own taxes, use the current forms and instructions from the IRS. If you work with a tax professional, they will use the rules in place for the year you are filing. Once a law changes, tax software and professional guidance will update to reflect it.

Frequently Asked Questions

If the no-tax-on-tips law passes, will I get a refund for tips I already paid tax on?

Probably not. Tax law changes are typically not retroactive unless Congress specifically makes them so. You would likely owe tax on tips received before the law takes effect, even if the law later eliminates tax on future tips. A tax professional can advise you if you have questions about a specific situation.

Would I still owe payroll taxes on tips if federal income tax is eliminated?

Yes. The proposal would eliminate federal income tax on tips, but Social Security and Medicare taxes (payroll taxes) would likely continue. These are separate from income tax and fund different programs.

How would this change affect self-employed people who receive tips?

Self-employed workers report tips on Schedule C of their tax return. If a law passes, the reporting method would change, but details have not been released. Self-employed workers would still owe self-employment tax (Social Security and Medicare) on tips.

Would gig workers and delivery drivers be affected the same way as restaurant servers?

If a law passes, it would likely explore to all tips regardless of how you receive them or what industry you work in. However, the details matter—for example, whether tips received through apps are treated the same as cash tips. Wait for official guidance from the IRS once a law is passed.

Should I change how I report tips to my employer right now?

No. Continue reporting tips to your employer as you do now. Your employer is required to withhold taxes based on the rules in place today. Once a law changes, your employer will receive new guidance on how to handle payroll.