Since 2024, there’s been a lot of speculation on what “no tax on tips” might look like. With a lot of speculation comes a lot of confusion. Your workers probably ask you a lot of questions about the policy.
Now that “No Tax on Tips” is fully enacted, let’s address the misconceptions that we hear all the time!
At CSI Accounting & Payroll, we’ve provided small business financial and advisory services for 60 years. We stay on top of law changes that may affect our clients, including “No Tax on Tips”. Let’s discuss:
Misconception: “No Tax on Tips” means my employees will see that money back on their checks immediately.
Reality: It’s actually a deduction on their return during tax season. Provided they’ve always been reporting their tips and continue to do so, nothing changes for them throughout the year.
Misconception: “No Tax on Tips” means a worker’s tips won’t be taxed, period.
Reality: The deduction only applies to federal income taxes, and they’re only eligible for up to $25,000 in qualified tip income (not including mandatory service charges or unreported tips). FICA taxes (Social Security and Medicare) are still paid fully by both employees and employers.
Misconception: Anyone who makes tips is eligible for “No Tax on Tips”.
Reality: Freelance or self-employed income doesn’t count, and there is limited eligibility depending on occupation.
The IRS says the deduction is for beverage and food service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery workers.
See the full eligible occupation list from the IRS.
Misconception: You can make up to $160,000 in earnings to be eligible, and it applies to all of your tips.
Reality: The maximum deduction is on federal income taxes for up to $25,000 in qualified tip income. The deduction begins to phase out if your Modified Adjusted Gross Income (MAGI) exceeds $150,000 (single) or $300,000 (married filing jointly).
Misconception: Once “No Tax on Tips” starts, it’s permanent tax law.
Reality: Like many tax laws, it’s only here to stay for a few years. This deduction will only apply to 2025-2028 tax years unless extended by Congress. So tell your employees to report their tips and claim the deduction now!
Now that you know about how quickly misconceptions can spread, are you ready to check out payroll services with CSI Accounting & Payroll to stay on top of law changes that affect your business?
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