IRS Clarifies How to Claim ‘No Tax on Tips’ Deductions

The Internal Revenue Service (IRS) has issued guidance that it said clarifies how to claim deductions associated with the “No Tax on Tips” law.

The guidance also provides “transition relief” for workers who receive tips in specified service trades or businesses, the IRS said in a Friday (Nov. 21) press release.

The Wall Street Journal reported Friday that the guidance could allow more workers to take advantage of the law’s tax breaks by delaying a provision that prevents workers in a specific service trade or business to claim the deduction. These workers include those in health, law, performing arts and athletics, according to the report.

Friday’s guidance said that restriction won’t be enforced until a year after the final regulations are released, which means it probably won’t be in effect for tax year 2026 either, the report said.

Many workers were uncertain how to report tips for tax year 2025 because they may not have all the records or information they need from their employers, per the report.

“No Tax on Tips” became law as part of The One Big Beautiful Bill signed into law by President Donald Trump.

In a page devoted to the law, the White House said that there are about 6 million workers who report tipped wages and that, on average, Americans will receive about $1,300 more per year when they don’t have to pay tax on tips.

It was reported in May that while eliminating federal income taxes on tips would provide relief to workers, it could also create some issues. For example, the policy could lead to new occupations introducing tips and existing tipped occupations relying on tips more heavily; income being misclassified as tips; and workers earning similar incomes in different occupations being taxed differently.

PYMNTS reported in May that this no-tax status could provide further tailwind for tips to be paid out digitally rather than in cash. Because better record keeping and tracking of income will be critical as businesses and workers move to embrace the tax reporting changes, there could be a rise of digital platforms and instant disbursements that will help hasten the shift away from cash.