The Internal Revenue Service (IRS) has relaxed a rule on its new directive called the ‘No Tax on Tips’ provision, which offers significant tax relief for millions of tipped workers. The relaxation will allow more workers to enjoy the perks of the directive, which was included in US President Donald Trump’s signature ‘One Big Beautiful Bill Act’, a key pledge of his 2024 presidential campaign.
What is the ‘No Tax on Tips’ directive?
Under the new guidance, workers in specific occupations where tips were customarily and regularly received before 2025 may exclude up to $25,000 of their ‘qualified tips’ from taxable income from 2025 through 2028. Qualified tips’ include voluntary cash or card tips, even if not separately reported by the employer, but do not include mandatory service charges.
What is the new relaxation and who gets to benefit?
According to the IRS, an estimated 6 million workers reported tipped wages.
While occupations such as sommelier, cocktail waiter, pastry chef, cake baker, bingo worker, club dancer, DJ, clown, podcaster, influencer, online video creator, were among the beneficiaries, according to the US Treasury Department, certain other professions couldn’t benefit from the tax break.
As per the new relaxation, workers who receive tips in the course of a ‘specified service trade or business’ will be able to temporarily benefit.
Specified service trade or business refers to any trade or business providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing in securities, partnership interests, commodities, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
As for those working overtime, the maximum overtime deduction on tips, which may be calculated via “reasonable methods” is $12,500 for individual filers and $25,000 for joint filers, according to the IRS.
The deduction phases out for taxpayers earning over $150,000 individually or $300,000 as a couple and the deduction is available for both itemising and non-itemising taxpayers.