No Tax on Tips? Here’s What the New Deduction Really Means for Michigan Workers (2025–2028)

If you work in a tipped profession—whether you’re serving drinks in downtown Ann Arbor, styling hair in a Brighton salon, or delivering pizza in Lansing—there’s some promising news on the tax front. A brand-new federal deduction is on the way that could significantly reduce your taxable income beginning in 2025.

It’s being widely labeled as the “No Tax on Tips” law—but as a CPA serving hardworking individuals across Michigan, I want to help you understand what this really means. Spoiler: it doesn’t mean all your tips are tax-free. But for many Michiganders who earn a living in tip-heavy industries, it’s a welcome opportunity to lower your tax bill legally.

Let’s dive into the details so you can see how this deduction might benefit you or someone in your household.

What Is the “No Tax on Tips” Deduction?

Starting in tax year 2025, and continuing through 2028, eligible workers in tipped occupations may deduct up to $25,000 in qualified tips per year from their taxable income.

That’s right—tips you receive for doing your job may now reduce your federal tax liability, if they meet certain qualifications.

This new deduction is available to both:

• W-2 employees (like servers, bartenders, stylists)

• Self-employed individuals (like independent massage therapists, mobile groomers, and freelance artists)

For many Michigan residents in the service industry, this could mean thousands of dollars in tax savings every year—but only if you follow the rules and report your tips properly.

What Tips Count as “Qualified”?

Not all tips are treated equally under this new law. For your tips to count toward the deduction, they must be:

1. Voluntary – This means the tip must be given freely by the customer. Automatic gratuities, service charges, or mandatory fees are generally not included.

2. Properly reported – You must have official documentation of the tips, such as:

   • Reported on your W-2 from your employer

   • Received and reported on a 1099 (for self-employed workers)

   • Or another IRS-recognized official statement

Cash tips, card tips, and shared tips (via tip pooling) can all be included—as long as they’re reported correctly and included in your income.

This is an important distinction. If you’re working under the table, or if your tips aren’t being recorded or tracked in your tax filings, you won’t qualify for the deduction. As your CPA, I always recommend full compliance to avoid trouble with the IRS and to take advantage of deductions like this one.

What Kind of Jobs Qualify in Michigan?

The IRS is expected to release a formal list of qualifying occupations by October 2, 2025, but for now, we can safely assume this will include the typical tipped professions we see all over Michigan, including:

• Waitstaff and bartenders

• Hair stylists and barbers

• Nail technicians

• Hotel and hospitality staff (bellhops, valets, housekeeping)

• Delivery drivers and rideshare drivers (Uber, Lyft, DoorDash, etc.)

• Massage therapists and estheticians

• Casino dealers and service attendants

• Golf caddies and course attendants

Whether you’re working in Metro Detroit, Grand Rapids, Traverse City, or any of the many local service economies across the state, if your job customarily involves tips, you’re likely going to be eligible.

The law specifically warns not to expect eligibility if you’re just starting to accept tips to qualify. So if your job never traditionally involved tipping and suddenly you start a “tip jar” in 2025, the IRS is likely to scrutinize that.

Income Limits to Know

The deduction is designed to benefit working-class and middle-income earners, not high earners.

Here are the phaseout limits:

• $150,000 modified adjusted gross income (MAGI) for single filers

• $300,000 MAGI for married joint filers

If your income exceeds those thresholds, the deduction will gradually phase out and eventually disappear. This makes the deduction especially relevant for many Michigan families, where the cost of living is relatively moderate and incomes often fall below those limits.

Special Rules for Self-Employed Workers

If you’re self-employed and earn tips—say you’re an independent mobile barber or own a small cleaning business where clients tip you—there are a couple of key things to remember:

• Your tip deduction cannot exceed your net income from that business.

• In other words, if your business shows a net profit of $20,000, that’s the most you could deduct—even if you received $25,000 in tips.

That said, for many solo business owners, this is still a significant tax benefit and one that can help reduce self-employment taxes as well as federal income taxes.

How Do You Claim the Deduction?

The process will vary slightly depending on whether you’re a W-2 employee or self-employed:

If You’re a W-2 Employee:

• Your employer will report your total tips on your W-2 (Box 1 and Box 7).

• You’ll report the tips as usual on your tax return, then take the new deduction on a separate line (to be released in updated 2025 forms).

• You’ll still owe Social Security and Medicare taxes on your tips, but this deduction will reduce your taxable income for federal income tax purposes.

If You’re Self-Employed:

• You’ll include your tips in your gross income and report them on Schedule C.

• You’ll calculate your net business income after expenses.

• Then, you can claim the tip deduction (up to $25,000 or net income limit) on your 1040.

Regardless of your employment type, you don’t need to itemize to claim this deduction—it’s available even if you take the standard deduction. This is a huge win for many Michigan taxpayers who don’t itemize.

What Employers Need to Know

If you own a restaurant, salon, or any business where employees receive tips, you’ll need to take a more active role in compliance.

Employers must provide employees (and the IRS) with:

• A statement of total cash tips received

• The occupation of the employee

• Proper IRS or SSA reporting

This adds to your payroll and reporting responsibilities starting in 2025. If you’re a small business owner in Michigan and unsure how to adjust your payroll systems, I’d be glad to walk you through the compliance requirements before they go into effect.

What This Means for Michigan Families

Here in Michigan, thousands of workers in the service industry rely on tips to make ends meet. This new deduction can mean more take-home pay, lower tax bills, and greater financial stability.

For example:

• A Detroit bartender who earns $20,000 in tips annually and properly reports them could now deduct that full amount from their taxable income—potentially saving $2,000–$3,000 or more on their federal taxes.

• A Traverse City salon owner who is self-employed and earns $25,000 in tips could deduct it—assuming her net profit meets or exceeds that amount—lowering both income and self-employment tax liability.

• A server in Novi making $40,000 in wages and $15,000 in tips could qualify for the deduction and still fall under the income phaseout threshold—meaning real savings.

Planning Ahead: How I Can Help

As a solo CPA based here in Michigan, I work directly with clients like you—no hand-offs, no call centers, just me. My goal is to keep you informed, prepared, and confident in your tax filings.

To prepare for this deduction and maximize its benefit:

✅ Make sure your tips are being reported correctly
✅ Track your annual income to avoid phaseouts
✅ If you’re self-employed, keep accurate books and records
✅ Ask me to run a deduction scenario for 2025 so you can plan ahead
✅ Don’t rely on TikTok or viral tax trends—this is serious money on the line

Final Thoughts

This isn’t a loophole. It’s a legitimate deduction that can benefit Michigan’s tipped workforce in a big way—but only if you know how to use it.

From servers and stylists to drivers and dealers, if you or someone in your family relies on tips, now is the time to get organized, track your earnings properly, and prepare to take advantage of this opportunity.

If you have questions about whether you qualify, how to report tips correctly, or how this impacts your overall tax strategy, I’m here to help.

Let’s make sure the IRS gives you the credit you deserve.
📞 Contact me today at https://persitzcpa.com to schedule a personal consultation.

Whether you’re in Howell, Lansing, Detroit, or anywhere in between—I’ll help you get the most out of every dollar you earn.