The legislation known as One Big Beautiful Bill Act of 2025 (OBBBA) introduces a major change to how tip income is treated for federal tax purposes. Starting with tax year 2025, legislation allows eligible workers to deduct up to $25,000 in reported tip income from their federal taxable income.

Here’s a breakdown of what the law states, who qualifies, who doesn’t, and what tax professionals should consider when advising clients.

Key provisions of the no tax on tips

• Annual deduction limit: Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned

• Eligibility:

  • By Oct. 2, 2025, the IRS must publish a list of occupations that “customarily and regularly” received tips on or before Dec. 31, 2024. Examples likely include waiters, bartenders, hotel bellhops, casino dealers, hairdressers, and other similar service roles.
  • The deduction only applies to cash or card-based tips that you received from customers or through tip sharing in qualifying jobs. Service charges, regular wages or non-cash rewards are not considered qualified.
    • Adjusted gross income (AGI): $150,000 for single filers
    • $300,000 for married filing jointly

• Timeframe: applies to tax years 2025 through 2028

• Phaseout formula: the deduction is reduced by $100 for each $1,000 by which the taxpayer’s modified AGI exceeds the threshold.

• Employer reporting requirement: Tips must be reported to the employer and shown on Form W-2 or Form 1099 to qualify for the deduction.

Special focus: cash tips must be reported

Cash tips are often overlooked or underreported. Under this law, failure to report means loss of the deduction. Tips must be reported to the employer and included on statements furnished to the individual under IRC §6041(d)(3), §6041A(e)(3), §6050W(f)(2), or §6051(a)(18), or reported by the taxpayer on Form 4137.

Additional provisions

• Social Security number requirement: The taxpayer must include their Social Security number on the return to claim the deduction.
• Joint filers: Both spouses must file jointly to claim the deduction if married.
• Anti-abuse rules: The secretary is authorized to issue regulations to prevent reclassification of income as tips and to prevent abuse of the deduction.

What doesn’t count?

Not all payments received by service workers are eligible for the new tip income deduction. Tax professionals should be aware of the following exclusions:

• Unreported cash tips
• Tips not listed on the W-2 or Form 1099
• Service charges

Example: At a restaurant, Jamel’s bill includes a 15% service charge automatically added because he is part of a large group. He pays the total with his credit card. Even though it looks like a tip on the receipt, it’s a mandatory fee and not eligible for the tip income deduction. His server is Josh; therefore, Josh cannot count the 15% service fee as a tip.

There’s an income phaseout

The deduction is subject to an income-based phaseout. For every $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income MAGI exceeds $150,000 ($300,000 for joint filers), the deduction is reduced by $100.

Considerations for tax pros

1. Review client records

Advise clients in tip-based occupations to maintain accurate, contemporaneous records of all tips received and reported. Consistent tracking throughout the year is essential.

2. Confirm W-2 accuracy

Make sure client’s W-2s accurately reflect total reported tips. If clients have unreported tips , they must file Form 4137 to pay the appropriate FICA taxes. Remember, these unreported tips are not eligible for the deduction.

3. Withholding adjustments

Help clients estimate proper withholding or estimated quarterly tax payments based on the lower taxable income from the deduction.

4. Audit risk and compliance

Be alert to any attempts to reclassify wages as tips. Document legitimate tip income clearly to reduce audit risk.

5. Advise employers

Update payroll systems to ensure tips reported by employees are correctly captured. Businesses in the personal care sector may now benefit from an expanded FICA tip credit.

Final takeaway

The new tip deduction offers tax savings to lower- and middle-income workers, but only if they correctly report all tips to their employer. Tax professionals should ensure clients know the rules and follow them closely to benefit from this provision.

The IRS has signaled a shift in its interpretation of the Johnson Amendment, stating it will not treat political endorsements made during worship services as violations of tax-exempt rules. The announcement follows a proposed consent judgment with the National Religious Broadcasters Association and two Texas churches. As Giselle Ruhiyyih Ewing for Politico reported on July 8, 2025, the move has significant implications for religious organizations and raises important considerations for tax professionals advising nonprofits.

The background: challenging the Johnson Amendment

At the heart of this development is the long-standing 1954 Johnson Amendment, which prohibits §501(c)(3) organizations (including churches) from participating in or intervening in political campaigns. Though the IRS has rarely enforced this provision, it has remained a key boundary separating tax-exempt religious activities from partisan politics.

That boundary may now shift. As outlined in the proposed settlement, political endorsements shared in the context of a religious service are interpreted as personal expressions within a spiritual community, rather than institutional campaign activity. This distinction effectively shields such speech from violating IRS tax-exempt status rules.

The lawsuit and the IRS response

The National Religious Broadcasters Association, together with two churches, filed the lawsuit in August 2024, arguing that the Johnson Amendment restricted their First Amendment rights. In response, the IRS acknowledged that it has not pursued enforcement actions against churches engaging in electoral commentary during services, and asserted that such practices resemble “family discussions” rather than campaign interventions.

The new guidance appears to formalize this long-unspoken policy, stating that political discussions within the context of worship services do not necessarily constitute prohibited political activity.

Implications for tax professionals

While the move may seem limited in scope, it introduces ambiguity into an already nuanced compliance area. Tax professionals advising churches, religious or other §501(c)(3) organizations should take note of the following considerations:

• Guidance vs. law: This shift comes through a legal settlement applicable to the involved parties, not a formal regulatory change or legislative repeal. Practitioners should stay alert for further IRS updates or court rulings before advising clients to make significant changes.
• Narrow scope: The change pertains specifically to verbal endorsements within religious services. It does not authorize churches to spend money on political campaigns, distribute campaign materials or engage in broader political advertising. These activities are still considered violations.
• Audit risk: Although enforcement has historically been rare, nonprofits navigating political expression should ensure they document the nature, timing and setting of any candidate-related statements to demonstrate compliance.
• Slippery slope concerns: Critics, including the National Council of Nonprofits, warn that this could allow political operatives to route campaign messaging or donations through charitable organizations, undermining the spirit of tax-exempt law. Evangelical groups, however, have praised this development as a long-awaited affirmation of free speech rights within faith communities.

NATP perspective

At NATP, we are monitoring this shift closely. Tax professionals must walk a fine line between enabling lawful free speech and ensuring organizations maintain compliance with §501(c)(3) restrictions. As the IRS redefines that boundary, tax preparers need clear guidance and continuing education to help clients stay on the right side of the law.

We encourage tax preparers to review Giselle Ruhiyyih Ewing’s original reporting for Politico, “IRS moves to allow political engagement from churches, in a win for evangelical groups,” published July 8, 2025.

NATP will continue to provide updates as more guidance is provided.

Question: Maya is a freelance software developer. In 2025, she completed a project for a client who agreed to pay her in Bitcoin (BTC) instead of U.S. dollars. The client transferred 0.02 BTC to Maya’s digital wallet. Is this taxable to Maya?

Answer: Yes, it is taxable to Maya. Maya must pay taxes on the virtual currency (aka cryptocurrency) she receives. When receiving cryptocurrency in exchange for services, it is considered taxable income. For tax purposes, cryptocurrency is treated as property and must be reported as ordinary income. The amount of income is determined by the fair market value (FMV) of the cryptocurrency in U.S. dollars on the date it is received.

In Maya’s case, since she is operating as a business rather than an employee, she should report her earnings from these payments as self-employment income.