Tips up to $25,000/year are now exempt from federal income tax. See exactly how much more money you take home every paycheck.
Starting in 2026 and through 2028, tip income up to $25,000 per year is exempt from federal income tax. This affects restaurant workers, bartenders, hotel staff, delivery drivers, nail technicians, valets, and anyone else who earns tips. Tips are still subject to Social Security and Medicare taxes, and state income taxes may still apply depending on your state.
Tip exemption up to $25,000/yr. Phases out $150k–$400k MAGI (single) / $300k–$550k (married) at $100 per $1,000 over threshold. Expires after 2028. FICA and state taxes still apply.
| Gross Pay incl. Tips (this check) | $0.00 |
| Federal Income Tax | −$0.00 |
| Tip Exemption Applied | $0.00 ✓ |
| State Income Tax | −$0.00 |
| Social Security (6.2% — tips included) | −$0.00 |
| Medicare (1.45% — tips included) | −$0.00 |
| Net Take-Home Pay | $0.00 |
Not completely. Under the One Big Beautiful Bill, tip income up to $25,000 per year is exempt from federal income tax only. You still pay Social Security (6.2%) and Medicare (1.45%) on all tip income. Your state may also still tax tips — California, New York, and most other states have not adopted a tip exemption.
The exemption applies to workers in industries where tipping is customary — restaurants, bars, hotels, salons, spas, delivery services, and similar service industries. There is also an income phase-out: for single filers, the $25,000 exemption shrinks by $100 for every $1,000 of income above $150,000, and disappears entirely above $400,000. For married filers, the phase-out runs from $300,000 to $550,000. Most tip workers fall well below these thresholds.
Yes. You are still required to report all tips to your employer and the IRS. The exemption reduces your taxable income — it doesn't eliminate your reporting requirement. Unreported tips can result in penalties.
Yes. The exemption applies to all tip income — cash tips, credit card tips, and tips shared through a tip pool — as long as the total doesn't exceed $25,000 for the year.
Only the first $25,000 of tip income is exempt from federal income tax. Any tips above $25,000 are taxed at your normal federal income tax rate. All tips — exempt or not — are still subject to Social Security and Medicare taxes.
Most states have not adopted a tip exemption. Only states with no income tax (Texas, Florida, Nevada, etc.) effectively have no state tax on tips. California, New York, Illinois, and most other states still tax tip income at the normal state rate. Our calculator accounts for your state's tax separately.
Yes — overtime pay is also exempt from federal income tax under the same legislation. Use our Paycheck Calculator to calculate both tip and overtime exemptions together in one calculation.
The tip tax exemption applies to tax years 2026 through 2028. If you file taxes in early 2027 for the 2026 tax year, eligible tip income up to $25,000 should be deductible. Employers may begin adjusting withholding immediately based on IRS guidance.