Definition
The tip income exclusion, created by the One Big Beautiful Bill Act (OBBBA) in 2026, allows workers in tipped industries to exclude up to $25,000 of annual tip income from federal income taxation. 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.
The exclusion is an above-the-line deduction, meaning you don't need to itemize to claim it. It reduces your adjusted gross income for withholding calculation purposes.
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 →Related terms
OBBBA Deductions
New 2026 above-the-line deductions created by the One Big Beautiful Bill Act — for tips, overtime, seniors, and auto loans.
Withholding
Taxes taken out of each paycheck before you receive it.
FICA
The combined Social Security and Medicare payroll taxes — 7.65% of wages for most employees.