No Tax on Tips? What Freelancers Need to Know About the $25,000 Deduction in the 'One Big Beautiful Bill Act'

Whether you’re self-employed or employed and work in a tipped profession, there is a new opportunity to lower your federal income tax bill—thanks to the newly enacted 'One Big Beautiful Bill Act (OBBBA).'

For the first time, qualifying freelancers can deduct up to $25,000 in tips from their taxable income starting in tax year 2025, but as of right now, this deduction only qualifies until 2028. But before you celebrate, let’s unpack what this means and how to make it work for you.

What’s New Under 'OBBBA'

The “No Tax on Tips” provision applies to federal income tax only. That means while you can deduct tips from your taxable income, they still count toward your self-employment tax—the 15.3% you pay for Social Security and Medicare (for the self-employed or half of this if you are employed).

Here’s the breakdown:

• Maximum Deduction: Up to $25,000 in qualified tips, but not more than your net income from the business where the tips were earned.
• Income Limits: The deduction phases out if your modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).
• Qualifying Occupations: The IRS has released a preliminary list of occupations that customarily and regularly received tips on or before December 31, 2024. This list is expected to be finalized in coming regulations and includes a wide range of professions.

Who Qualifies? Treasury’s Preliminary List

The Treasury Department’s preliminary list includes over 80 occupations across industries such as food service, personal care, entertainment, hospitality, home services, and transportation. Some highlights:

• Food & Beverage: Bartenders, wait staff, cooks, dishwashers, and host staff.
• Personal Care & Wellness: Massage therapists, barbers, hairstylists, aestheticians, tattoo artists, and fitness instructors.
• Entertainment & Events: Musicians, dancers, DJs, ushers, and digital content creators (including streamers and podcasters).
• Home Services: Electricians, plumbers, HVAC installers, landscapers, and cleaners.
• Transportation & Delivery: Rideshare drivers, shuttle operators, valet attendants, and goods delivery workers.

Importantly, the law excludes certain trades and businesses—such as health care, performing arts, and athletics—from claiming the deduction. The Treasury Department has indicated that further guidance will clarify these exemptions.

Reporting Requirements

Starting in 2026, employers must include the Treasury Tipped Occupation Code (TTOC) on Forms W-2, along with the qualified tip amount. This means taxpayers should:

• Track tips separately from base pay
• Report all income on Schedule C
• Include occupation details on Form 1099 or other IRS-approved statements

While the IRS won’t require updated W-2 reporting for 2025, employers may choose to voluntarily provide this information to help workers claim the deduction.

What Freelancers Should Do Now

If you’re in a tipped profession, this is the time to get organized:

• Set up a dedicated tip log—digital or paper.
• Review your business classification to ensure you’re not excluded.
• Talk to your tax advisor about estimated payments and how this deduction might affect your quarterly filings.
• Watch for final IRS guidance and the official occupation list later this fall.

And don’t overlook emerging professions. Digital content creators—streamers, online video hosts, and podcasters—are now explicitly included. If you receive viewer tips or donations, you may qualify.

This new 'OBBBA' tip income deduction might be beneficial for many freelancers and employed individuals who receive tips—but only if you’re prepared. As always, the key to maximizing your tax benefits is good recordkeeping, proactive planning, and knowing where you stand. If you have questions about tip deductions for your freelance business.