New 50% Tip Income Tax Deduction Explained

The bill introduced a new 50% deduction for reported tip income for workers in service jobs such as restaurants, salons, bartending, hospitality, etc. Effective for 2025 through 2028

This deduction applies to W-2 Form 1099, or other specified statement furnished to the individuals who receive tips and report those tips as income.

How It Works

When employees report their tips, those tips are considered taxable income — they increase:

• Federal income tax
• Social Security & Medicare (FICA) tax
• State income tax (in most states)

Now, workers can deduct 50% of their reported tips from their taxable income on their federal tax return.

Example

Let’s say an employee earns:

• $18,000 in hourly wages
• $12,000 in tips (all reported correctly)

Previously, all $30,000 was taxed.

Now:

• The employee gets a deduction for 50% of the $12,000 tips → $6,000 deduction
• So, they are only taxed on $24,000 instead of $30,000

This lowers their federal income tax amount and can lower their bracket.

Important Notes

Applies to:

Employees who report tips (W-2 workers)

Does Not Apply To:

Owners, self-employed, or unreported (cash-in-pocket) tips.

Purpose:

Encourages legal reporting of tips, reduces tax burden on service workers.

Limitations:

150k Single

300K MFJ