The Effect of the 2025 Budget Law on Taxing Tips
The federal tax law that was passed in 2025 makes major changes to how the federal government taxes some income. The effect of the 2025 budget law on taxing tips is that employees who work in occupations that traditionally receive gratuity for their services are now able to take a deduction for some or all of their tip income, depending on how much they earn.
Notably, both employers and employees must track the new changes. Contact an experienced tax resolution attorney at Dayes Law Firm who could help you remain compliant with federal law and maximize your deductions.
What Is the New Tax Law About Tips?
The 2025 federal tax law introduces a new tip deduction that impacts eligible workers in traditionally tipped occupations. Under this provision, employees can deduct up to $25,000 of qualified cash tip income from their federal taxable income for the years 2025 through 2028. The deduction phases out for single filers with a modified adjusted gross income of over $150,000 and joint filers with over $300,000.
To qualify, gratuity must be voluntarily received, properly reported to employers, and, importantly, must include only cash payments, which will typically affect professions like servers, bartenders, hairdressers, and other tipped workers.
How Does the New Tax Law on Tips Affect Employers?
The new budget law on gratuity requires employers to accurately track and report employees’ cash tips to ensure compliance with the tax deduction limits. Employers must maintain detailed records of all tips received and reported on W-2 forms, including separating tips received in cash from those that are credit or digital payments, which are not deductible.
While the law provides a benefit to employees, it increases administrative responsibilities for employers, who may need to update payroll systems and train staff on proper reporting procedures. Businesses also need to calculate payroll taxes based on total tip income, even if portions are deductible for income tax purposes. Making any mistakes on this calculation could lead to potential penalties from the IRS.
How Can Employees Plan for Their Taxes With the New Law on Tips?
With the new tip deduction law, employees can better plan for taxes by keeping detailed records of all cash tips received and accurately reporting them to employers. Tracking cash gratuity separately from credit card or digital payments is essential, as only tips paid in cash qualify for the deduction.
Employees should estimate their taxable income, including tips, to anticipate potential tax liability and adjust withholding or make estimated tax payments if necessary. Consulting a tax law attorney could help maximize the deduction and ensure compliance. Proper planning allows tipped workers to reduce their federal income taxes while avoiding penalties.
Contact Us To Understand the Effects of the New Budget Law on Tips
If you are an Arizona worker affected by the new federal tip deduction law, the experienced attorneys at Dayes Law Firm could help. We guide employees and small business owners through reporting requirements, maximizing deductions, and ensuring compliance with the latest tax rules. From recordkeeping to calculating taxable income, our team provides personalized strategies to lower your taxes and avoid penalties.
Contact Dayes Law Firm today to schedule a consultation and get guidance on how the effect of the 2025 budget law on taxing tips impacts you.
