No Tax on Tips Act Becomes Law: What Beauty Professionals Need to Know for 2025

A new federal law passed in July 2025 introduces significant changes for beauty professionals and business owners who receive or report tips. The law includes two key provisions:

1. A federal income tax deduction on reported tips for eligible employees.
   
2. An expansion of the 45B FICA Tip Tax Credit to include employers in the beauty and personal care industry.
   

While this legislation offers potential financial relief for professionals and business owners, it is also highly controversial. The tax benefits are funded through cuts to federal programs such as SNAP (Supplemental Nutrition Assistance Program), Medicaid, and several other government services.

Whether you support the bill or have concerns about its broader impacts, it has been signed into law and will begin impacting the 2025 tax year. Here’s what you need to know.

What the “No Tax on Tips” Provision Means for You

Tip Income Deduction for W-2 Employees

Beginning in tax year 2025, eligible W-2 workers in tipped professions,  including hairstylists, barbers, nail techs, estheticians, and massage therapists,  may deduct a portion of their tip income from federal income taxes.

Key details:

• Up to $25,000 of reported tip income can be excluded from federal taxable income.
  
• The deduction begins to phase out for individuals earning more than $150,000 ($300,000 for married couples filing jointly).
  
• This provision is temporary and currently set to expire after December 31, 2028.
  

Who Qualifies?

To qualify:

• You must be a W-2 employee.
  
• You must report your tips to your employer.
  
• Your occupation must be one where tipping was “customary and regular” as of December 31, 2024.
  

Independent contractors (1099 workers) are not eligible under the current language of the bill.

FICA Taxes Still Apply

Importantly, this law only applies to federal income taxes. Tips are still subject to FICA (Social Security and Medicare) taxes, and both employees and employers are still responsible for those payroll contributions.

What the 45B FICA Tip Tax Credit Means for Business Owners

For the first time, salons, spas, and barbershops that employ W-2 staff can claim a dollar-for-dollar tax credit for the employer-paid FICA taxes on employee-reported tips. This provision brings the beauty industry in line with the restaurant sector, which has received this credit since the 1990s.

Why this matters:

• Employers can now recoup payroll taxes paid on income they don’t keep.
  
• The credit could help improve cash flow and support reinvestment in staff, training, and business growth.
  
• Accurate tip reporting will be essential to calculate and claim this credit.
  

How the Bill Is Funded

This bill has sparked significant public debate not just for its content, but for how it is paid for. According to analyses from multiple budget sources, funding for SNAP and Medicaid is expected to be reduced significantly over the next decade. While estimates vary across sources, projected cuts include $250–300 billion for SNAP (food assistance for low-income families) and $700 billion to $1 trillion for Medicaid, depending on eligibility enforcement and budget caps.

While supporters argue that the bill offers crucial relief to service workers, critics are concerned about its funding sources, specifically the potential impacts on vulnerable populations due to cuts to programs like SNAP and Medicaid, as well as concerns about increased long-term federal debt. Early projections from the Congressional Budget Office estimate that the bill could contribute to an increase in the federal deficit by $2.8–3.4 trillion over the next 10 years.

What Beauty Professionals Should Do

For W-2 Employees:

• Report your tips accurately to ensure eligibility.
  
• Keep organized records of your tip income throughout the year.
  
• Talk to a tax professional about how this deduction may affect your 2025 return.
  

For Salon, Spa, and Barbershop Owners:

• Prepare to claim the 45B tax credit by ensuring your payroll and tip reporting systems are compliant and up-to-date.
  
• Work with your accountant to incorporate this credit into your 2025 tax planning.
  
• Stay informed about any updates or clarifications as the IRS provides further guidance.
  

A Moment of Change for the Beauty Industry

Regardless of personal views on the legislation, this law marks a substantial shift in how tip income is treated at the federal level. For many in the beauty industry, it offers a potential opportunity for greater financial stability or reinvestment,  but it also raises valid concerns about equity, funding, and long-term sustainability.

At Booksy, we are committed to helping beauty professionals stay informed and prepared. We’ll continue sharing updates, offering educational resources, and providing the tools you need to run and grow your business confidently in this new environment.