One of the most talked-about changes from the One Big Beautiful Bill Act (OBBBA) is the new above-the-line deduction for qualified tips (up to $25,000) and overtime premium pay. For millions of service industry workers, bartenders, drivers, and hourly employees, this could mean real money back in their pockets when filing 2025 taxes in early 2026.
But here’s the big question everyone’s asking: Will you really see a bigger refund check because of “no tax on tips”?
The short answer: Yes — very likely — but only if your employer didn’t change withholding.
Let’s break it down clearly so you know exactly what to expect.
How the “No Tax on Tips” Actually Works
This isn’t a complete tax exemption — it’s an above-the-line deduction for qualified cash tips received in certain occupations (e.g., food service, beauty, delivery, hospitality).
• Maximum deduction: $25,000 for tips (combined with overtime premium pay cap of $12,500).
• Phase-out: Begins at $150,000 modified AGI (single) or $300,000 (married filing jointly).
• Key detail: Tips must be reported to your employer (as usual) to qualify.
• Big win: This deduction reduces your adjusted gross income (AGI), lowering taxable income before you take the standard deduction or itemize.
Result? Lower tax liability for 2025.
Why Many Workers Will See Bigger Refunds in 2026
Here’s the part most people don’t realize yet:
Most employers continued withholding federal income tax on tips throughout 2025 — just like they always have. They didn’t stop or reduce withholding just because the new deduction exists.
That means:
• You paid tax on your tips all year (through withholding).
• But when you file your 2025 return in 2026, you get to deduct those tips (up to the limit).
• The IRS essentially owes you back the tax you overpaid on those tips.
Example:
Sarah, a server, earned $30,000 in tips in 2025. Her employer withheld federal tax on all of it (say, about $4,500 in her bracket).
When she files in 2026, she deducts $25,000 of those tips → her taxable income drops significantly → she gets most or all of that withheld tax refunded.
This mismatch (withholding as usual + new deduction) is why many experts predict larger-than-expected refunds for tipped workers filing in early 2026.
Who Benefits Most?
• Full-time servers, bartenders, baristas, hair stylists, delivery drivers
• Workers who accurately reported tips to employers
• Those under the income phase-out thresholds
• People who take the standard deduction (this stacks on top!)
Common Myths vs. Reality
Myth: “My boss said there’s no tax on tips now, so nothing was withheld.”
Reality: Rare. Most payroll systems didn’t change withholding rules automatically.
Myth: “This only helps if I itemize.”
Reality: No — it’s above-the-line, so everyone with qualifying tips benefits.
Myth: “Cash tips left on the table don’t count.”
Reality: They do — if reported properly to your employer (required by law anyway).
What Should You Do Now?
1. Gather records: Collect W-2s, pay stubs, and personal tip logs.
2. Don’t assume your employer adjusted withholding — check your final 2025 pay stub.
3. Plan for 2026: Some employers may reduce tip withholding next year — meaning smaller refunds but bigger paychecks.
4. Talk to a tax pro: Especially if you have side gigs or mixed income sources.
The Bottom Line
Yes — if you’re a tipped worker and your withholding didn’t change, you’re likely in for a pleasant surprise when you file your 2025 taxes in 2026. This OBBBA provision puts real money back in the hands of hardworking service professionals.
Are you in a tipped job? Do you expect a bigger refund this year? Drop a comment below — I’d love to hear your experience!
This is general information, not personalized tax advice. Rules can vary by situation — consult a qualified tax professional.
Share this post if you know someone who works for tips — they’ll thank you when that refund hits! 🚀
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