New Federal Tax Relief on Tips: What Service Professionals Need to Know

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Beginning with the 2025 tax year, U.S. workers in tip-based industries can benefit from a major new tax break: up to $25,000 of tips per year are excluded from federal income tax (IRS).

For hairstylists, barbers, nail technicians, massage therapists, and many other professionals in the beauty and service industries, this law can mean thousands of dollars in savings — but only if you qualify and keep proper records.

How the Rule Works

Until now, both service fees and tips were fully taxable. Under the new rule, “qualified tips” are deductible, up to $25,000 per year.

Example:

  • Total income: $100,000 (services + tips)
  • Of which tips: $30,000
  • Before the law: Federal income tax owed on $100,000
  • With the new law: Federal income tax owed on $75,000 ($100,000 – $25,000 deduction)

Source: Bipartisan Policy Center

Who Qualifies?

  • Industry: The deduction applies to occupations that “customarily and regularly receive tips” as of December 31, 2024 (IRS). The IRS will publish an official list of these occupations by October 2, 2025.
  • Income threshold: Full deduction allowed for income up to $150,000 (single) or $300,000 (joint filers). Above this, the deduction phases out (BPC).
  • Type of tips: Only voluntary tips qualify. Mandatory service charges or fees included in the bill are not eligible (Paycom).

Potential Savings

How much you save depends on your federal tax bracket:

  • 22% bracket → up to $5,500
  • 24% bracket → up to $6,000
  • 32% bracket → up to $8,000

What Service Professionals Need to Do

  1. Separate recordkeeping – Track service charges and tips separately.
  2. Documentation – Applies whether you’re an employee (W-2), independent contractor (1099-NEC or 1099-K), or report tips via Form 4137.
    • Note: Form 1099-K, issued by payment processors like Square or PayPal, usually includes both service fees and tips. You’ll need to separate them internally. (IRS)
  3. Report correctly – Claim the deduction when filing your 2025 tax return (due in early 2026).

Important Limitations

  • Payroll and self-employment taxes still apply: The 15.3% combined Social Security and Medicare tax is calculated on total income, including tips (RSM).
  • Temporary provision: The deduction applies for tax years 2025 through 2028 only (IRS).
  • Federal only: This change does not apply to state income taxes in most states.

Example Scenario

Sarah, a stylist, earns $120,000 in 2025, including $35,000 in tips. She is in the 24% tax bracket.

  • She deducts $25,000 in tips (the maximum allowed).
  • Federal income tax savings: about $6,000.
  • She still pays 15.3% self-employment tax on the full $120,000.

The “No Tax on Tips” provision is one of the most significant tax changes for service professionals in years. With the right records, you could save $5,000–$8,000 annually.

👉 To maximize benefits, consult a tax professional familiar with the beauty and service industries.

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