Do You Understand the “Tip Income Tax Exemption” Policy?

— A Guide to the Tip Income Tax Relief in the One Big Beautiful Bill Act (OBBBA)

The One Big Beautiful Bill Act (OBBBA) introduced, for the first time, a federal tax exemption specifically for tip income. This policy targets workers who rely heavily on tips for their livelihood, such as restaurant servers, hotel housekeepers, bartenders, nail technicians, and others in the service industry.

Effective Period

The tip income tax exemption is valid from January 1, 2025, to December 31, 2028, covering four tax years. Starting in 2029, the previous taxation rules will resume.

Exemption Limits

Annual exempted tip income is capped at $25,000 for individuals and $50,000 for married couples filing jointly. The benefit phases out as adjusted gross income (AGI) exceeds certain thresholds: approximately $150,000 for individuals and $300,000 for households.

Filing and Compliance

The exemption only applies to tip income reported by employers and accurately filed in tax returns. It does not apply to unreported or untaxed cash tips. The exemption is claimed during annual tax filing, not reflected in monthly paychecks.

Important Note

While the policy exempts tip income from federal income tax, it does not waive Social Security and Medicare taxes (FICA). According to federal tax law:

• Federal Income Tax: ✅ Exempt (2025–2028)
• Social Security Tax (6.2%): ❌ Not Exempt
• Medicare Tax (1.45%): ❌ Not Exempt

This means both employers and employees must still pay FICA taxes on tip income regardless of the federal tax exemption.

Purpose and Target Group

This measure aims to ease the tax burden on low-income service workers and improve their disposable income. It has received particular attention in states like Nevada, where service industry employment is high.

Conclusion

This policy provides a four-year tax relief window for tipped workers. Eligibility depends on proper employer reporting, accurate tax filing, and individual income levels. Workers are advised to confirm their employer’s compliance and consult a tax professional during annual filing.

Sources: OBBBA legislative text, Tax Foundation, ITEP, Paycom, IRS

By Nevada Chinese Perspective