Trump’s New No Tax on Tips Law Explained (OBBBA 2025 Update) – Image 2
icon September 15, 2025
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Payroll Compliance

Trump has signed the OBBBA of 2025, introducing a groundbreaking new tax law that eliminates federal income taxes on tips. In this video, we break down everything you need to know about this historic change — who it applies to, when it starts, and how it impacts millions of tipped workers across the United States.

✅ What you’ll learn in this video:

  • What the OBBBA 2025 law says about no taxes on tips
  • How the “No Tax on Tips” law affects restaurant, hospitality, and service workers
  • When the new tax rules for tips go into effect
  • How employers and employees should prepare for this major change
  • Potential benefits and challenges of the new law

📢 This is one of the biggest tax changes for tipped workers in decades — and it could mean more money in your pocket. Watch now to understand how this Trump tax law could impact you and your business.

🔔 Subscribe to our channel for more updates on tax law changes, IRS news, and small business tips.

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⚠️ DISCLAIMER

This video is intended for education purposes and should not be taken as legal, financial or tax advice.  You should consult with a professional about your unique situation before acting on anything discussed in these videos.  Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but it cannot give blanket advice to a broad audience.  Things are always changing, therefore, this channel may not contain the most up-to-date information.  Neither Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. nor its members can be held liable for any use or misuse of this content.

TRANSCRIPTION

Imagine your staff taking home more money from their tips because federal income taxes no longer withheld, but you still stay compliant with payroll taxes and it doesn’t cost you more as the business owner. That’s exactly what’s happening under the new OBBVA no tax on tips rule. Welcome to the Freedom Group channel.

Freedom Group is made up of three companies that have served this community for more than 20 years in the areas of taxes, accounting, insurance, financial planning, and real estate. We provide complete support for your business and also your personal needs. So if you’re a new business owner or you just want to understand how these new laws affect you and your team, you’re in the right place.

Today, we’re unpacking one of the most talked about parts of the One Big Beautiful Bill Act or the OBBVA for short. It’s the provision that eliminates federal income tax on tips. This isn’t just a small change.

It’s going to affect how employees get paid, how you run payroll, and how much money stays in your local economy. Until now, tips received by your employees were taxed like regular wages. So if a server had earned $500 in tips, federal income tax was withheld along with Social Security and Medicare.

Employers had to report and withhold all of it. Employees took home less than they earned, of course. Now, qualifying tips are exempt from federal income tax.

This means that employees are no longer going to be subject to that federal income tax withholding on the tip portion. Businesses will have to adjust their payroll systems accordingly. Everyone still reports the total amount of tips, but the federal income part tax is gone.

So here’s what has not changed. The Social Security portion at 6.2% and Medicare at 1.45%. Those taxes still apply to tips, both for the employee and for the employer. The tips are still considered wages for those programs, for the FICA taxes.

You still have to report and withhold those amounts. So your staff won’t keep 100% of every tip, but without the federal income tax withholding, their take-home pay still rises compared to the old rules. For employees or for you, if you’re an owner-operator who also earns tips, the immediate benefit is more take-home pay.

No federal income tax withheld means more cash left over in each paycheck. Also, though, there is a max deduction for $25,000 or up to $25,000, which is going to lower your taxable income tax come tax time for federal purposes. And this is going to reduce your amount of tax due and also potentially can reduce your marginal tax rate on regular wages.

That means you will have more money available for spending, but hopefully also for savings, emergencies, or paying down debt. As a business owner, you also have a benefit. It’s going to be having happier employees without increasing your payroll costs, it’s going to be easier to hire and retain people, and it’s slightly going to be simpler on your payroll just because you’re withholding less.

But you still need to handle the Social Security and Medicare portion correctly to stay compliant. So let’s see the savings explained with some numbers. Okay, so say that you have a barista and that person receives $200 in tips this week.

Before the OBVBA, maybe $50 went to federal income tax withholding and about $15 to Social Security and Medicare, leaving around $135 of their take-home pay. Now with the new law, the $50 federal income tax is gone. Only the $15 FICA portion is withheld, so now your barista takes home $185.

That’s another $50 that week. Over the course of the year, that’s going to be $2,500 more in their pocket without you having to raise wages. So here are some key rules to keep in mind.

Number one is that only voluntary tips qualify. So that means any automatic service charge, it’s still considered a taxable wage. Number two, Social Security and Medicare still apply.

I can’t stress this enough. Number three, states make their own rules. So your state may still tax tips as income.

Number four, updating payroll software is going to be necessary and your W-2 reporting so that employees are going to be able to see the untaxed tips correctly. And what does this imply as far as planning for the owners? So this is what you should know. You have to confirm which tips in your business qualify.

You’re going to have to adjust your payroll process to stop the federal income tax withholding on those tips, but continue the FICA withholding. You’re going to have to educate or you should educate your employees so that they’re not surprised by the difference between the gross tips and their net paycheck. If you tell them in advance, it’ll reduce the questions after they see it in their check.

And also you’re going to want to review overall compensation plans that your business offers. This is a good time to look at whatever service charges you have, tip pooling and incentives. And you might be wondering, does this apply to state income tax? Not necessarily.

Each state sets its own rules. So you’re going to have to verify that depending on what state you are in. And what about service charges? Mandatory fees like those applied to large parties are still taxable as regular wages.

Those are not exempt. Only true voluntary tips qualify. Could the IRS audit this? Of course they can.The IRS is updating its guidance, but good record keeping is still the essential part of the equation here. We can help you set all of that up. Just click on the link in the description to schedule your consultation with Freedom Group.

We’ll walk you through these changes step by step. So in conclusion, the OBBBA no tax on tips provision is designed to put more money into the hands of the people who earn it and to reduce the administrative burdens on businesses. For employees, it’s going to end up resulting in higher take-home pay because federal income tax is no longer withheld.

For the business owner, it just means a happier staff and slightly easier payroll, but you still need to handle Social Security and Medicare. Getting professional advice now can prevent costly mistakes later. If you’d like personalized guidance, Freedom Group can help.

Schedule a consultation today and we’ll review your particular situation, including how this OBBBA tip rule applies to you. And we can show you how to stay compliant while keeping more of your money in your pocket. Thanks for watching.

And of course, if you found this helpful, please don’t forget to like it, subscribe, and share with other business owners. To dive deeper into the other major tax changes in the OBBBA, watch the video appearing on your screen right now. In it, we cover some of the top 2025 tax laws every business owner should know.

Click that suggestion and keep learning to stay ahead. God bless you, and we will see you in the next video.

Summary

A Historic Tax Change for Service Workers

The One Big Beautiful Bill Act (OBBBA) introduced one of the most significant payroll changes in decades: voluntary tips are no longer subject to federal income tax withholding. For tipped employees like servers, bartenders, or baristas, this means more take-home pay without employers increasing wages. Businesses, meanwhile, must adjust payroll practices while staying compliant with Social Security and Medicare tax rules.

What Changed — and What Didn’t

Until now, tips were treated the same as wages: subject to federal income tax, Social Security (6.2%), and Medicare (1.45%). Under the OBBBA rule, tips are still subject to FICA taxes (Social Security and Medicare), but the federal income tax portion is eliminated. That means employees keep more of their tips, while employers still report and withhold FICA taxes as before.

Example:
 A barista earning $200 in tips weekly once lost around $50 to federal withholding. With the new rule, that $50 stays in their paycheck. Over a year, this could mean $2,500 extra cash in hand — without extra payroll costs for employers.

Benefits for Employees and Employers

For employees, the law provides a direct increase in disposable income, reducing financial strain and potentially lowering their taxable income through a $25,000 deduction cap. For employers, it creates a happier workforce, easier recruitment, and slightly simpler payroll processes. Business owners also benefit from retaining staff without higher wage expenses.

Key Rules to Remember

  • Only voluntary tips qualify. Automatic service charges (such as for large parties) remain taxable wages.
  • Social Security and Medicare taxes still apply to all tips.
  • States set their own rules — not all states will exempt tips from state income tax.
  • Payroll software updates are required to properly report untaxed tips on W-2 forms.
  • Recordkeeping is critical in case of IRS audits.

What Business Owners Should Do Now

Employers need to:

  • Confirm which tips qualify under the new law.
  • Adjust payroll systems to stop federal income tax withholding on tips while maintaining FICA deductions.
  • Educate staff to prevent confusion between gross and net tips.
  • Review compensation structures, tip pooling, and service charges.
  • Stay informed on IRS and state-specific guidance.

Why Professional Guidance Matters

While the OBBBA change simplifies some payroll processes, compliance still requires careful handling. States may continue taxing tips differently, and IRS reporting rules are still evolving. Poor recordkeeping or misapplied rules could lead to audits, penalties, or disputes with employees.

The Bottom Line

The OBBBA no tax on tips provision is a win for workers and a relief for employers — but only if implemented correctly. Employees get higher take-home pay, while businesses enjoy better retention and no added wage expense. Employers must still ensure accurate payroll reporting, FICA compliance, and state-level tax checks.

Learn More

About FREEDOMTAX ACCOUNTING

For more than 20 years, FREEDOMTAX ACCOUNTING has helped businesses and individuals navigate tax law changes with confidence. From payroll compliance to tax planning, our team of experts makes sure you stay ahead of new regulations like the OBBBA 2025 update. We provide personalized strategies to maximize your savings while keeping you fully compliant.

Call FREEDOMTAX ACCOUNTING today to schedule a consultation and learn how the new no tax on tips law impacts your payroll, your employees, and your bottom line.

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