TAX BULLETIN – Tax Tips, News, & Updates: Issue No. 3 | Vol No. 4

The next series of issue No 3 will focus on Tax related aspects of the One Big Beautiful Bill Act! This volume No 4 (newsletter) focuses on the decrease or elimination of taxes related to Tip-Income.

Current Tax Policies on Tips

Generally, Tips are taxable wages and are subject to both Federal Insurance Contribution Act (FICA) taxes and ordinary income taxes, based on the IRC Code. Federal payroll taxes include taxes on both the employee and employer of 6.2% of a worker’s wages, up to a taxable maximum ($76,100 in 2025) to finance the Social Security trust funds, as well as of 1.45% of a worker’s wages to finance the Medicare Hospital Insurance trust fund.

HR1 OBBB Act Policies on Tips

As passed by the House, Section 110101 of H.R. 1, the One Big Beautiful Bill Act creates a new income tax deduction for “qualified” tip income for tax years 2025 through 2028, which could be claimed in addition to the standard deduction.

Qualified tips include those incomes received in non-employee arrangements (such as by independent contracting!) This would be limited to those in occupations that traditionally receive tips and that are paid voluntarily and without negotiation. This benefit phases out for those taxpayers who earn $160,000 or more.

This One Big Beautiful Bill (OBBB) Act: HR1 of the 119th Congress bill reduces taxes, reduces, or increases spending for various federal programs, increases the statutory debt limit, and otherwise addresses agencies and programs throughout the federal government.

Impacts of this Policy

Proponents and opponents of this Bill have observed that some will benefit while others will not benefit from this policy. Nevertheless, we observe that the impact of such a policy may vary by taxpayers’ incomes. Generally, most low-wage workers are not in tipped occupations, but those in tipped occupations earn less, on average, than other workers and are often not liable for taxation, due to already established tax credits, such as the Earned Income Credits (EIC).

Workers in tipped occupations who owe no or little income tax, because they have low incomes would benefit little, if at all, from excluding tips from income subject to tax. Those who face higher marginal tax rates—generally, those with higher incomes—would benefit more than those facing lower rates.

Other things to note about this controversial Bill are:

Reactions to the Bill

Results of independent research and analyses from several organizations have suggested that most of the benefits of this Bill skew toward the wealthy. Kiplinger also reported on the results of their opinion polls on this Bill They conclude that more Americans oppose than support the big bill.

WE HOPE YOU ENJOYED & LEARNED FROM THIS MONTH’S BULLETIN!

Contact us for more information which is specific to your situation as there are always exceptions to the IRS rules and specific to the states’ rules!