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A policy that was embraced by both the Democratic and Republican candidates during the 2024 presidential campaign made it into the final version of the recently enacted tax and budget bill, and will affect employers in the service industry starting next year.
The provision in President Donald Trump’s “One Big Beautiful Bill,” called “No Tax on Tips,” will allow eligible tipped workers to deduct up to $25,000 from their tipped income each tax year from 2025 to 2028.
The Internal Revenue Service (IRS) recently published a draft W-2 form taking this policy change into account, and said it would publish a list of occupations that may be eligible to take advantage of the tax break in early October.
How taxes will change for tipped workers in 2026. Federal law allows employers to pay their tipped workers as little as $2.13 an hour provided that amount, combined with tips, comes out to $7.25 (the federal minimum wage).
Workers that receive at least $20 a month in tips have to report these earnings to the IRS, and pay taxes on them if their gross income reaches a certain level. President Trump campaigned on ending this practice, as did his Democratic opponent, Kamala Harris.
The final “No Tax on Tips” provision that made it into the Republican tax bill will allow workers in jobs that “customarily and regularly received tips” on or before Dec. 31, 2024 to claim the deduction. Workers who report $150,000 or more in gross income will see the deduction reduced and ultimately phased out.
The policy is unlikely to affect the entire tipped worker population (roughly 2.5% of all workers), as more than one-third (37%) of workers didn’t pay income tax for this reason, according to The Budget Lab.
What this means for employers with tipped workers. A draft W-2 form published by the IRS on Aug. 15 includes a section for employers to report employees’ “qualified tips” using the code “TP,” as well as a place to report an employee’s “tipped occupation code.”
It’s not yet clear what type of work will fall under the provision. The IRS is required to publish a list of occupations that fall under the “customarily and regularly received tips” category by Oct. 2.
Additionally, the IRS is expected to give employers additional guidance on how to calculate the amount of “qualified tips” a worker earned. For the purpose of this deduction, tips paid voluntarily via cash or credit card should count, but it’s still not clear whether automatic charges such as mandatory gratuities will fall under this category.
The IRS also said it would provide “transition relief” to workers claiming the deduction, as well as employers, in light of the new reporting requirements.
More tax changes on the horizon. The draft W-2 also includes modifications linked to additional provisions from the tax bill that are set to change the way employers report on workers’ earnings.
Certain workers will be eligible for a tax deduction on their overtime pay, so businesses will need to report overtime compensation if they have workers that qualify for that deduction. Additionally, employers will have the option to contribute to “Trump accounts” on behalf of their employees’ kids starting next year—a benefit that will also need to be reported on a W-2 form.