Starting in 2025, qualified tip income is deductible from federal taxable income for eligible workers — the first time in modern tax history that tip income has received preferential federal tax treatment. For Frederick County restaurant workers, bartenders, salon professionals, and hospitality employees, this is real money. But Maryland has not conformed, which changes the math significantly.
The One Big Beautiful Bill Act created a new above-the-line deduction for qualified tip income received by eligible employees and self-employed individuals. For tax years 2025 through 2028, workers in occupations that customarily and regularly receive tips can deduct qualifying tip income directly from their federal adjusted gross income — reducing their federal taxable income dollar for dollar.
This is an above-the-line deduction, meaning it is available whether the taxpayer takes the standard deduction or itemizes. You do not need to itemize to claim it. For a full overview of all OBBBA changes, see our complete OBBBA guide.
Effective tax years 2025 through 2028. Above-the-line deduction — available to standard deduction and itemizing filers alike. Applies to qualified tips received in occupations that customarily and regularly received tips as of December 31, 2024. Income limit: phases out for taxpayers with modified AGI above $150,000 (single) or $300,000 (married filing jointly).
The IRS published guidance defining which occupations qualify based on those that customarily and regularly received tips as of December 31, 2024. The qualifying occupations relevant to Frederick County workers include:
Not every tip qualifies for the deduction. The provision applies to:
Tips that do not qualify include:
Many Frederick County restaurants add automatic gratuities of 18% to 20% for large parties. These are classified as service charges — wages paid by the employer — not tips. They do not qualify for the no-tax-on-tips deduction even though customers may think of them as tips. Only voluntary tips paid at the customer's discretion qualify.
The savings depend on the worker's total tip income and federal tax bracket. Here are examples for Frederick County hospitality workers:
| Annual Tip Income | Federal Bracket | Federal Tax Saved |
|---|---|---|
| $10,000 | 12% | $1,200 |
| $20,000 | 22% | $4,400 |
| $30,000 | 22% | $6,600 |
| $40,000 | 22% | $8,800 |
For a server or bartender earning $25,000 in tips annually at a 22% federal bracket, the deduction is worth approximately $5,500 in federal tax savings per year — a meaningful increase in take-home pay.
Here is the critical Maryland-specific caveat: Maryland has not conformed to the no-tax-on-tips provision. Tip income that is deductible from federal taxable income remains fully taxable on your Maryland income tax return.
This means a Frederick County server who earns $25,000 in tips receives federal tax savings of approximately $5,500 — but owes Maryland and Frederick County income tax on the full $25,000 in tip income, just as before. At the combined 8.75% Maryland rate, that's approximately $2,188 in Maryland tax that is not reduced by the federal provision.
Maryland's General Assembly would need to pass conforming legislation to extend the tip deduction to the Maryland return. As of June 2026, Maryland has not done so. We are monitoring this and will update clients if Maryland acts. For a full breakdown of Maryland-federal conformity differences, see our article on Maryland vs federal tax differences.
Some workers may be tempted to reduce their Maryland withholding based on the federal tip deduction. This would be a mistake — Maryland tax on tip income has not changed. Reducing Maryland withholding based on the federal deduction will result in a Maryland underpayment at filing time. Only your federal withholding or estimated payments should be adjusted.
The no-tax-on-tips provision creates several compliance and planning considerations for restaurant owners and other hospitality employers:
Tips remain reportable wages for W-2 purposes. Employers are still required to report all tip income on employee W-2s in Box 1 (wages) and Box 7 (social security tips). The federal deduction is claimed by the employee on their individual return — it does not change the employer's wage reporting obligations.
This is perhaps the most important point for workers expecting significant savings: the no-tax-on-tips deduction applies only to federal income tax. FICA taxes — Social Security and Medicare — still apply to tip income in full. Tips are still subject to the 7.65% employee FICA tax (or 15.3% for self-employed individuals). The deduction does not reduce payroll tax obligations.
Restaurant employers have long been able to claim a tax credit (Section 45B) for the employer's share of FICA taxes paid on tip income above the minimum wage. This credit continues under the OBBBA and remains an important tax planning tool for food service employers. If you own a restaurant and are not claiming the FICA tip credit, contact our small business tax team.
For the deduction to be claimed correctly on employee returns, tip income must be separately tracked and reported on W-2s. Most modern POS systems already separate service charge income from voluntary tip income — but employers should confirm their payroll system is properly distinguishing between the two categories, since service charges do not qualify for the deduction.
The no-tax-on-tips provision applies to tips received in the course of employment — not to self-employment income. A self-employed hair stylist who owns her own salon and receives tips from clients may not qualify under the same rules as an employee stylist at a salon that employs her. The IRS guidance on self-employed tip deductibility is more limited than for employees.
Self-employed workers in tip-customary occupations should consult a CPA to determine their eligibility before claiming the deduction. The distinction between employee tips and self-employment income is fact-specific and the IRS has indicated it will scrutinize self-employed tip deduction claims carefully.
Yes. The IRS requires workers to maintain records of tip income — a tip diary or log that tracks daily tips received is the standard. In practice, most workers who receive tips through credit card transactions through their employer already have records available through their pay stubs and W-2. Cash tips require more diligent recordkeeping. Tips reported on your W-2 automatically qualify — unreported tips do not.
Yes — if you work in a qualifying occupation, all qualifying tip income is deductible regardless of whether you also receive an hourly wage. The deduction is not limited by the amount of your hourly pay. Your employer should report your tip income separately on your W-2, which is what you use to claim the deduction on your federal return.
Tips received through food delivery platforms by workers in qualifying delivery occupations may be eligible, but the rules depend on whether the worker is classified as an employee or an independent contractor of the platform. Platform workers classified as independent contractors face different rules than W-2 employees. This is an area where IRS guidance is still developing and individual circumstances matter significantly.
If you are a W-2 employee of the salon, yes — you likely qualify for the tip deduction if your occupation is listed as tip-customary. If you own the salon and receive tips as the business owner, the analysis is more complex. Business owners who receive tips through their self-employment income rather than as an employee tip may not qualify under the same rules. This is worth discussing with a CPA before claiming the deduction.
Roy Cogliandolo, CPA
Mercer Flanagan · Frederick, MD · February 2026
Whether you're a restaurant worker claiming the deduction or an employer figuring out payroll reporting, we help Frederick County hospitality businesses navigate the new rules correctly.
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