The 2025 Trump tax regulation — One Large Stunning Invoice Act (OBBBA) — contains provisions for “No Tax on Suggestions” and “No Tax on Extra time.” It says when you earn suggestions, you gained’t pay tax on these suggestions.
As you possibly can count on, not everyone seems to be eligible, and never all suggestions may have no tax. “No tax” covers just one kind of tax, not all taxes. What’s the catch? Let’s take a deep dive.
Occupation
To begin with, you should be in “an occupation which usually and frequently acquired recommendations on or earlier than December 31, 2024.” Don’t assume you possibly can run to your boss or your purchasers and have part of your pay categorized as suggestions when you’re not in these occupations.
Sure traces of enterprise are mechanically excluded. These embody well being, regulation, accounting, actuarial science, performing arts, consulting, athletics, monetary providers, and brokerage providers. You don’t qualify whether or not you’re employed as an proprietor or an worker and obtain suggestions in these companies.
“Performing arts” stands out on this record. The others within the record sometimes don’t get suggestions. Does that imply a band or a singer gained’t qualify in the event that they obtain suggestions?
Voluntary Suggestions Solely
A tip qualifies provided that it “is paid voluntarily with none consequence within the occasion of nonpayment, is just not the topic of negotiation, and is set by the payor.” I assume because of this a compulsory 20% service price for a gaggle of six or extra gained’t depend.
The ideas might be both money or card costs. Shared suggestions depend too.
Correctly Reported
When you’re in the best occupation, it doesn’t matter whether or not you’re a W-2 worker otherwise you’re paid by a 1099. Restaurant and lodge workers paid by a W-2 qualify. Uber and DoorDash drivers paid by a 1099 qualify as effectively.
The ideas should be reported to you and the IRS on the W-2 or 1099. Or you possibly can file Type 4137 along with your tax return to report suggestions along with the quantity on these W-2 or 1099 kinds.
Presently, the W-2 kind solely has a field for allotted suggestions. Unallocated suggestions are blended with common pay in different packing containers on the W-2. 1099-NEC and 1099-Okay kinds don’t have a separate area for suggestions proper now. The IRS should amend these kinds with a spot to interrupt out suggestions. Till then, your employer or payor can report the tricks to you individually outdoors the W-2 or 1099.
Momentary Window
As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Suggestions” is just efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
This provision solely impacts your federal earnings tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks. When you’re paid by a 1099, it doesn’t cut back the self-employment tax it’s essential to pay along with the common earnings tax. It doesn’t cut back your state taxes.
The IRS will make modifications to payroll tax withholding to deal with suggestions in another way, however the modifications gained’t begin till 2026. You gained’t see any change in your paychecks in 2025 except you alter your tax withholding along with your employer.
Tax Deduction
You’ll have a brand new tax deduction on your earnings from suggestions once you file your tax return. You’ll get a better tax refund if the tax withholding was too excessive.
This deduction is obtainable whether or not you are taking the usual deduction or itemize your deductions. Nevertheless, it doesn’t decrease your AGI. Your earnings from suggestions continues to be included in your AGI. It doesn’t make it simpler so that you can qualify for different tax advantages, such because the Youngster Tax Credit score.
Greenback Cap
You could not be capable of deduct all of your suggestions. There’s a $25,000 cap. This cover is similar whether or not your tax submitting standing is single, head of family, or married submitting collectively.
I assume Congress thinks {that a} married couple has at most one individual incomes suggestions. Subsequently, the greenback cap is similar for a single individual and a married couple. When you’re married, and each of you earn suggestions, the greenback cap on your mixed suggestions is similar as that for a single individual.
Submitting separate returns doesn’t assist, since you aren’t allowed this tax deduction when you’re married submitting individually.
When you earn suggestions in a self-employed enterprise (as an example, a sole proprietor hairdresser) and also you deduct enterprise bills, the greenback cap can also be restricted by the online revenue in any case enterprise bills. When you acquired $20,000 in suggestions however the enterprise solely made $15,000 in web revenue, you possibly can solely deduct $15,000.
Revenue Phaseout
The $25,000 cap goes down slowly as your earnings will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of earnings above the brink. The cap drops to zero when your earnings will get to $400,000 ($550,000 for married submitting collectively).
Most individuals receiving suggestions don’t have an earnings that prime and gained’t be affected by the earnings phaseout.
Each Suggestions and Extra time
“No Tax on Suggestions” and “No Tax on Extra time” are unbiased of one another. You qualify for each when you obtain each suggestions and extra time pay (or one individual in a married couple earns suggestions and the opposite will get extra time). When you’re 65 or older, you additionally qualify for the Senior Deduction.
Calculator
I made a calculator that can assist you estimate your federal earnings tax earlier than and after “No Tax on Suggestions” and “No Tax on Extra time.” Use the calculator to see how a lot you’ll profit. Go away the extra time fields at 0 when you don’t have any extra time.
When you’re married submitting collectively, please embody earnings and suggestions from each of you.
The calculator estimates taxes utilizing primary assumptions. It doesn’t embody the self-employment tax when you’re paid by a 1099. Your taxes could also be totally different when you’ve got a extra complicated state of affairs.
***
You’ll discover extra deep dives on latest modifications from the 2025 Trump tax regulation within the full OBBBA sequence.
Say No To Administration Charges
If you’re paying an advisor a proportion of your property, you’re paying 5-10x an excessive amount of. Learn to discover an unbiased advisor, pay for recommendation, and solely the recommendation.
