Recently, I had coffee with my sibling who works as a server at a favorite Korean restaurant. They asked why their pay stub still looks the same if tips are no longer taxed.

I had thought similarly after just seeing the news headlines, so I decided to look into it properly this time. To put it simply, what has changed is not all the taxes on tips, but only a portion of the federal income tax.

The One Big Beautiful Bill Act, passed in July 2025, introduced a new tip income deduction. From 2025 to 2028, eligible tips can be deducted from taxable income up to a maximum of $25,000 per year.

The good news is that you can receive this deduction without itemizing. Most servers who take the standard deduction can still benefit from this.

However, this is where many people get confused. The FICA tax, which includes 6.2% for Social Security and 1.45% for Medicare, totaling 7.65%, still applies to tips just like before.

This means that the amount deducted from paychecks does not suddenly decrease significantly. This is why my sibling felt that their pay stub looked the same.

So, how much do servers actually save? The formula is simple. It's the amount of tips deducted multiplied by your income tax bracket rate.

For example, if you earned $10,000 in tips and all of it fell into the 12% bracket, your federal income tax would decrease by $1,200. You would still pay $765 in FICA on that same $10,000.

On the other hand, if someone originally had a low income and their taxable income was nearly zero due to the standard deduction, the situation is different. The tax savings would be minimal, which is honestly a bit disappointing.

Nevada has no state income tax. So for servers here, this federal deduction is almost everything. It's convenient not to have to worry about state tax calculations separately.

By the way, Nevada does not allow tip credits. Starting in July 2024, the minimum wage will be standardized at $12 per hour, regardless of tips.

This is particularly important for Korean restaurants. Service charges, like the automatic 18% added for large groups, do not qualify as deductible tips.

The IRS final regulations state that only voluntarily given money is considered a tip, even if a customer reduces it to $0. If a customer adds extra on top of an automatic service charge, only that additional amount is recognized as a tip.

Both cash tips and card tips qualify, and tips pooled with coworkers are included as well. However, they must be reported on a W-2 or 1099, or directly reported using Form 4137.

If you have a habit of casually passing off cash tips, now is a good time to correct that. Tips that are not reported have no basis for deductions.

There are also job restrictions. The Treasury and IRS finalized regulations on April 13, 2026, confirming a list of over 70 job categories.

Restaurant servers, bartenders, and baristas are naturally included. If you work in the kitchen and share tips, check the IRS website to see if your job is on the list.

There is also an income cap. If your adjusted gross income exceeds $150,000 for individuals or $300,000 for couples filing jointly, the deduction decreases by $100 for every $1,000 over the limit.

Couples must file jointly; if they file separately, they cannot receive this deduction. A valid Social Security number must also be on the tax return.

When filing, you will need to use the new Schedule 1-A form. Many people may have seen this form for the first time when filing for 2025 earlier this year.

Starting with the 2026 tax year, the paperwork will be a bit easier. The W-2 you receive in January will show the tip amount in Box 12 with code TP, and the job code will be in Box 14b.

So, it's a good idea to check in advance whether your employer is accurately recording tips at year-end. Many small Korean restaurants have owners who handle payroll directly.

If you want to reduce withholding and increase your take-home pay each month, you can also submit a new W-4. The 2026 W-4 will have a section to reflect this deduction.

However, be cautious not to reduce it too much, as you might end up owing taxes in April. It's better to start conservatively.

One more thing, this deduction is a temporary measure that only lasts until 2028. It's uncertain whether it will be extended, so it's best not to rely on it for long-term planning.

Although this law has been politically controversial, I believe servers should take advantage of what they can. However, it's misleading to think that there are no taxes on tips just by looking at the name.

If I were a server, I would do two things this year. I would report all cash tips to my employer and check that my pay records accurately reflect my tips.

I also told my sibling the same. It's worth the hassle since it can make a difference of several hundred dollars, or even over a thousand dollars a year.

Since tax brackets and deduction amounts vary by individual situation, I recommend checking with a tax professional or expert for the exact amount.