Transcript:
No tax on tips? Yes please, I will take that. So, gotta make sure now that I just change all of my wages into tips, right?
No problem. Well, not quite. We are going to dig into the One Big Beautiful Bill once again and we are going to talk about the no tax on tips provision.
Hi everyone, I’m David Lewis. I’m a certified public accountant and owner of High Impact CPA. This is our next foray into the One Big Beautiful Bill series where we go through the legislation that was passed this year and see what it actually means for you as a taxpayer, whether you’re a business or an individual, and how you can take advantage of the provisions and do a little tax planning so that you can pay less in taxes.
So, we’re going to jump right into it. So, the no tax on tips was a big selling point for this legislation.
It made a lot of headlines. It was very newsworthy because it affects a lot of people in lower to middle income brackets and it’s just very popular all around.
But obviously when you have such a broad statement as no taxes on tips, there’s going to be some truth to it and there’s going to be a conflation and misconstruing of what it actually means and what you can actually do with it.
You’re going to see a lot of social media gurus online say what I did at the top of the video, like, well, just go ahead and change all of your income into tip income, and you don’t have to pay taxes on it, right?
Oh man, if only, if only. Well, unfortunately for people scheming at that, yes, Congress and the people that wrote this bill do think about those things.
It actually does cross their mind, believe it or not, when it comes to putting in the final provisions of the bill.
So let’s look at what no taxes on tips actually means and what it could mean for you. So looking at the former law before we got the One Big Beautiful Bill, tips are like any other form of income.
They are included in your federal gross income to derive your taxable income. So that’s how it’s always been.
Like everything else, whether you’re a small business owner that takes tips or you’re an individual that takes tips, it all adds up and aggregates to come up with your taxable income that is then assessed.
So with the new provisions of the Big Beautiful Bill, there is a deduction now for up to $25,000 on qualified tips. And the most important thing I want to point out with this bill is that it relates to income tax only.
There are a couple different taxes that you’re assessed on your tax return. You have your income tax, which is the one that pretty much everyone is familiar with. However, there are also employment taxes that you pay.
Those are your Social Security and your Medicare that you pay into. Now, this $25,000 deduction does not apply to Social Security and Medicare.
You are still going to pay those taxes on those tips.
So very important. One, if you’re an employer, you still need to track the income on behalf of your employees because, as you know, you have to collect those taxes, you have to remit those taxes, you have to remit the employee’s portion, and you have to remit the employer’s portion to the IRS. So that is going to be unaffected by this provision.
You still need to track everything. And if you are a W-2 employee and you’re receiving tips, it needs to be reported on your W-2 and now it’s going to be broken out like it has in the past where you’re going to have the tips. Then on your own tax return that’s where you’re going to take the deduction, right?
So really, administratively, nothing changes from a W-2 perspective. You’re still going to get the same thing. You are going to have Medicare and Social Security taken out. You’re going to have federal income tax withheld. And then, at the end of the year, that’s where you’re actually going to figure out this deduction.
Also, with this deduction, there is an income phase-out. That means once you start making too much, this deduction goes away for you. And so this helps, obviously, balance the budget, which this bill certainly didn’t, but this is their way of saying, hey, we’re putting a cap on this deduction.
So, in this case, if your Modified Adjusted Gross Income (MAGI) exceeds $150,000 if you’re single or head of household, or $300,000 married filing jointly, for every extra $1,000 that you make, that deduction is reduced by $100.
Example: someone who’s filing status is single. They’ve got gross income for the year of $160,000. So this tip deduction gets reduced down to $24,000. That’s the extra $10,000 you made, $100 per $1,000 tranche.
Now you’re left with a $24,000 deduction—assuming you have $24,000 in tips to actually deduct.
Now here’s the fun part, and if anything, the most important provision in all of it. This is where people try to get smart.
First off, a tip has a very specific definition. The payor controls it. You have no ability to go after them in court if they don’t pay it.
So it is completely voluntary to the payor. And you have no way to say what they do or don’t give.
So one, you’re already skirting the definition of a tip. But two, Congress said they’re not just going to make up new positions or new types of jobs so that people can take advantage of this tax provision.
So if your occupation does not traditionally and customarily receive tips on or before December 31st of 2024, you don’t get to take the deduction.
If you were in a business or a position that regularly takes tips as of the end of last year, you’re good. It applies to you for that tip income. Think restaurant workers, massage therapists, dog groomers—anything that customarily receives tips counts.
Unfortunately, we don’t have the entire list just yet. Treasury’s working on it. We’re slated to get it in October. We’ll see if that happens.
Also, if you’re self-employed, this counts for you. You get the deduction for tips.
However, there’s an extra wrinkle. The tip income you receive cannot be used to also figure your Qualified Business Income for the Section 199A deduction. That would be double dipping.
Finally, this deduction as it stands now is not permanent. We get it for 2025, 2026, 2027, and 2028. After that, it goes away.
Anyway, if you have any questions regarding the income that you’re receiving, whether or not it qualifies for this particular deduction on tips, feel free to reach out to us at High Impact CPA.
We do free discovery calls all the time—there will be a link down in the description of this video.
As always, I appreciate you being here, appreciate you listening to some very dry topics, but hopefully it made a bit of a difference. Like and subscribe if you want more.
There’s going to be more videos coming out in the future. We’re trying to get them out a little bit faster, even with the extended deadlines and everything.
So look for more content coming soon. Thanks again, everyone. Have a great day.
