Definition
The tips deduction, created by the One Big Beautiful Bill Act (OBBBA) in 2025, allows workers in occupations that customarily receive tips to deduct up to $25,000 of qualified tips a year from federal taxable income, if total income is under $150,000 ($300,000 if married filing jointly). On the W-4 it is line 1a of the Deductions Worksheet. This is a significant benefit for restaurant servers, hotel workers, salon professionals, delivery drivers, and others in service industries.
Tips above $25,000 remain fully taxable. The exclusion applies only to federal income tax — FICA taxes (Social Security and Medicare) still apply to all tip income, including the excluded portion.
It is an above-the-line deduction, meaning you don't need to itemize to claim it.
How this affects your W-4
Enter your estimated annual tip income (up to $25,000) in the OBBBA section of the calculator. This reduces your taxable income for withholding purposes by the entered amount.
For a server earning $18,000 in tips in the 22% bracket, the exclusion saves approximately $3,960/year in federal income tax — about $152 per biweekly paycheck.
See how tip income exclusion affects your withholding
Use the free W-4 calculator to calculate your exact withholding with your specific situation.
Open the W-4 Calculator →Read the guide
No Tax on Tips and Overtime: What to Put on Your 2026 W-4
Tips and overtime are not fully tax-free. What the deductions cover, a worked example, and the W-4 line to use.
How the 2025 Tax Law (OBBBA) Changes Your 2026 W-4 Withholding
The One Big Beautiful Bill Act (signed 2025) added deductions for tips, overtime, seniors and car loan interest. Here is where each goes on your 2026 W-4.
Related terms
OBBBA Deductions
New deductions, available without itemizing, created by the One Big Beautiful Bill Act (signed in 2025) — for tips, overtime, seniors, and car loan interest — that apply to tax years 2025 to 2028.
Withholding
Taxes your employer takes out of each paycheck and sends to the IRS and your state before you receive your pay.
FICA
The combined Social Security and Medicare payroll taxes — 7.65% of wages for most employees.