The no-tax-on-tips rule has not yet gone into effect

As of now, tips remain taxable income at the federal level. President Trump signed an executive order in December 2024 directing the Treasury Department to draft rules that would exempt tips from federal income tax, but no law has passed and no implementation date has been set. The order was a directive to study the change, not an when ready tax cut.

The Treasury Department has not yet released proposed rules or a timeline for when this might happen. Until Congress passes legislation or the Treasury issues final regulations with an effective date, tips are still subject to federal income tax, Social Security tax, and Medicare tax in the normal way.

Key Takeaways

  • An executive order directing a no-tax-on-tips rule was signed in December 2024, but it is not yet law and has no effective date.
  • The Treasury Department must draft rules and Congress may need to pass legislation before any change takes effect.
  • Until official rules are released with an effective date, all tips remain taxable income for federal purposes.
  • State and local taxes on tips are separate from federal rules and would not be affected by a federal change.
  • If the rule does take effect, it would likely explore to tips received on or after the effective date specified in the final rules.

What the executive order actually said

The December 2024 executive order instructed the Treasury Department to "explore" and "consider" rules that would exclude tips from federal income tax. It did not create a tax exemption by itself. An executive order is a directive to federal agencies, not a law that changes the tax code.

For a permanent change to federal tax law, Congress would need to pass legislation. The Treasury Department can issue regulations that interpret existing law, but creating a new tax exemption for an entire category of income typically requires congressional action. The order set no important date for the Treasury to act.

How tips are taxed right now

Tips are currently treated as wages for federal income tax purposes. Employers are required to withhold federal income tax, Social Security tax (6.2 percent), and Medicare tax (1.45 percent) from reported tips. If you receive tips in cash and do not report them, you are still legally required to pay tax on them when you file your return.

Tipped employees must report tips to their employer, usually on a daily or weekly basis. The employer then includes those tips on your W-2 form at the end of the year. If your tips plus wages fall below minimum wage for your state, the employer must make up the difference in wages.

What would change if the rule takes effect

If the Treasury Department finalizes a rule and Congress does not block it, tips would no longer be subject to federal income tax. However, they would likely still be subject to Social Security and Medicare taxes, since those are separate from income tax. The exact scope would depend on how the final rule is written.

State and local taxes on tips would not be affected by a federal change. Some states tax tips as income, and those state taxes would continue unless the state passes its own law. A few states already do not tax tips, but most do.

When to expect an update

The Treasury Department typically takes several months to draft proposed rules and open them for public comment. After the comment period closes, the agency must review feedback and issue final rules. This process can take six months to over a year, depending on the complexity and the number of comments received.

Once final rules are issued, they usually specify an effective date — the date on or after which the new rule applies. That effective date could be the date the rule is published, a date later in the same year, or even a date in the following year. Until that date is announced in the final rule, there is no way to know when the change would take effect.

What you should do now

Continue to report all tips to your employer and set aside money for federal taxes as you normally would. Do not reduce your tax withholding or stop reporting tips based on the executive order. If the rule does take effect, you may be able to claim a refund for taxes paid on tips received after the effective date, but that would happen when you file your tax return for that year.

If you are self-employed and receive tips (such as a freelancer or contractor), keep records of all tips received. The rules for self-employed people may differ from rules for employees, and the final regulation will specify how each group is treated.

Frequently Asked Questions

Can I stop reporting tips to my employer right now?

No. Tips remain taxable income under current law. You are required to report tips to your employer. Not reporting tips can result in penalties and interest when you file your tax return. Wait until the Treasury Department issues final rules with an effective date before changing how you report tips.

Would tips still be subject to Social Security and Medicare tax?

That depends on how the final rule is written. The executive order did not specify. Social Security and Medicare taxes are separate from income tax, so they might continue to explore even if income tax on tips is eliminated. The Treasury Department's proposed rule will clarify this.

Would this change explore to tips I received in the past?

No. Tax rules generally explore only to income received on or after the effective date. Tips you received before the rule takes effect would still be taxable. You cannot claim a refund for taxes paid on tips received before the effective date unless Congress passes a law that specifically allows it.

Do I need to do anything to prepare?

Keep records of all tips you receive, including the date and amount. If the rule does take effect, you may need this documentation to claim a refund or to show the IRS which tips fall under the new rule. Continue following current tax law until you see an official announcement from the Treasury Department.