When Does No Tax on Tips Start? Key Dates & Facts
Starting in 2025, tipped workers across the U.S. might finally see some relief come tax season. The “No Tax on Tips Act”, recently passed by the Senate, proposes a game-changing shift for millions of service industry employees. If enacted into law, this bill would allow eligible workers to earn tips without paying federal income tax on them, beginning January 1, 2025.
Tipped employees — including waiters, bartenders, delivery drivers, hairstylists, and others — have long relied on gratuities as a core part of their income. Unfortunately, these earnings are still taxed, often heavily, despite being unpredictable and inconsistent. The proposed legislation aims to correct that by offering tax breaks to those earning under $160,000 per year, a group that comprises the vast majority of service workers.
Key Points: No Tax on Tips Act 2025
- Start Date: If passed, the law will take effect January 1, 2025.
- Tax-Free Limit: Up to $25,000 in tips per year could be tax-exempt.
- Who Qualifies?: Workers in traditionally tipped occupations earning $160,000 or less annually.
- Still Report Tips: Tip income must still be reported to your employer.
- Status: The bill has passed the Senate and awaits a vote in the House of Representatives.
- First Tax Season Impact: The exemption would show up in 2025 taxes, filed in early 2026.
The law, if finalized, could increase the take-home pay of hardworking individuals in the hospitality and service industries — many of whom struggled through the COVID-19 pandemic and rising inflation. The idea is simple: if you depend on tips for your livelihood, those tips should be yours in full, not partially lost to the IRS. And with $25,000 exempt from taxes, a worker in a mid-level tipping position could save $3,000 to $5,000 depending on their tax bracket.
Still, not everyone agrees on the bill’s merits. Some worry it could make taxes more complex for employers or reduce Social Security contributions in the long run. Others argue that the bill doesn’t solve the broader issue of low base pay in the service sector. However, support from both sides of the political aisle suggests that the bill could make it through Congress by the end of 2024.
For now, it’s wise for tipped workers to keep accurate records, continue reporting all tips, and follow updates from official sources like the IRS. Once the law is passed and IRS guidelines are issued, popular tax services like TurboTax, H&R Block, and FreeTaxUSA will likely update their systems to reflect the new benefits.
