The tax-cut law enacted in the United States on July 4, 2025 includes a new provision known as "No Tax on Tips." Waiters and bartenders can now deduct up to $25,000 (about 3.75 million yen) a year of the tips they receive from customers — but only for the four years from 2025 to 2028, and Social Security taxes still apply. In fact, tips in America have always been fully taxable income, down to a fine-grained rule that "tips of $20 or more in a month must be reported to your employer by the 10th of the following month." We sort out how the system works, the points of debate, and the surprising connections to Japan's "kokorozuke" gratuities and the withholding tax on hostess pay — all from primary sources of the IRS and Japan's National Tax Agency.
How it works: not "tax-free" but a capped deduction
The nickname "No Tax on Tips" has taken on a life of its own, but strictly speaking it is a new deduction used in calculating federal income tax. According to IRS guidance, the design is as follows.
| Item | Details |
|---|---|
| Deductible amount | The amount of qualified tips received, capped at $25,000 (about 3.75 million yen) per year |
| Applicable period | The four tax years 2025 through 2028 (a temporary, time-limited measure) |
| Qualifying tips | Tips paid voluntarily by customers in cash, by card or via apps. Tips shared among employees are included |
| Not qualifying | Service charges (automatic gratuities) added by the establishment. The amount is fixed, so they are not "voluntary" |
| Income limit | Phases out above adjusted income of $150,000 ($300,000 for joint filers). The deduction shrinks by $100 for every $1,000 over the threshold |
| Procedure | Attach the new "Schedule 1-A" to your tax return. Available whether you itemize or take the standard deduction |
| Conditions | A Social Security number is required. Married couples must file jointly. For the self-employed, the deduction is limited to the net income of that business |
Only federal income tax becomes "tax-free." Payroll taxes (Social Security and Medicare taxes) still apply to tips as before, and state income taxes may remain depending on each state's response. The obligation to report tips (tips of $20 or more in a month to your employer by the 10th of the following month) has not gone away either. If anything, only tips reported on a W-2 or similar form can be deducted, so accurate reporting has become the precondition for the deduction.
Eligible occupations are also limited. The final regulations, settled by the Treasury Department and the IRS in April 2026, list more than 70 occupations across 8 fields including food service, hospitality, beauty and delivery. The list runs from bartenders, waiters, hairdressers, golf caddies and delivery drivers to water taxi operators, floral designers and gas station attendants. The key point is that it is limited to "occupations that customarily and regularly received tips on or before December 31, 2024." The design prevents businesses from switching to tipping after enactment as a tax dodge, and tips in certain specified service trades such as law and medicine are excluded.
Why it was created: a country where tips are a pillar of pay
As background, tips in America carry a very different weight from Japan's kokorozuke gratuities. The federal minimum wage is $7.25 an hour (about 1,090 yen), but tipped workers have a separate "tipped minimum wage" of $2.13 an hour (about 320 yen), with the gap meant to be filled by tips (actual levels vary by state). It is not unusual for more than half of a waiter's income to come from tips; tips are built into the system not as a "kind gesture" but as part of wages.
- That is precisely why, for tax purposes, tips have always been fully taxable income. Tips of $20 or more in a month must be reported to the employer by the 10th of the following month for withholding, and there is even a dedicated form (Form 4137) obliging workers to pay payroll taxes on unreported tips
- The long-standing grievance of tipped workers — "money I clearly earned, shrunk by taxes" — has been a perennial theme, and in the 2024 presidential election the candidates of both major parties pledged "no tax on tips." The fact that Nevada, with its large service-industry workforce, was a battleground state is cited as part of the background
- On July 4, 2025, the pledge became law as part of the tax-cut act (nicknamed the "One Big Beautiful Bill"). Besides tips, the law includes a deduction for overtime pay (up to $12,500 a year), an additional deduction for seniors, and more
This article does not evaluate the policy as good or bad; it introduces the design and the points of debate. Indeed, criticism and support have come from both the labor side and the fiscal side (covered in the next section).
Results and debate: who actually benefits
- Fiscal impact: The Joint Committee on Taxation estimates the tip deduction alone will cost about $32 billion (about 4.8 trillion yen) in revenue over 10 years (about $10 billion in 2026 alone). That figure assumes the four-year expiration; a Congressional Budget Office estimate puts the cost at about $83 billion (about 12.5 trillion yen) if made permanent
- Fewer beneficiaries than you might think: According to a Yale University research institute, tipped workers number about 4 million — roughly 2.5% of all employment. Moreover, more than a third of them earn so little that they pay no federal income tax to begin with, so the deduction brings them zero benefit
- The fairness question: At the same restaurant and the same hourly pay level, the waiter on the floor can take the deduction while the cook in the kitchen, who receives no tips, cannot. And because it is a deduction, the tax saved per dollar is larger for those in higher tax brackets — an inefficient design, critics note, if the goal is supporting low earners
- Concerns about side effects: Labor research groups warn it creates an incentive for employers to lean harder on tips instead of raising base pay, and that it could accelerate "tip creep" — tip prompts appearing on every payment screen
- A chaotic first year: For tax year 2025, payroll reporting forms could not keep up with the new rules, and the IRS granted transitional relief (penalty waivers) on employers' reporting obligations. The deduction itself began being used with the 2026 filing season
Comparison with Japan: "kokorozuke" gratuities are taxable too
Japan has no tax exemption for tips — but most people probably do not even know whether tips in Japan are taxed in the first place. The answer is "they are."
| United States | Japan | |
|---|---|---|
| Role of tips | A pillar of wages (tipped minimum wage of $2.13) | An exceptional "kokorozuke." The mainstream is a service charge built into the bill |
| Income tax | Taxable income. Deductible up to a cap for 2025–28 | Taxable. Tips received directly from customers are reportable as miscellaneous income and the like |
| Payroll tax / social insurance | Social Security and Medicare taxes apply to tips (and continue after the deduction) | If paid out as salary, included in the basis for social insurance premiums |
| Withholding | Monthly reporting to the employer and withholding. Shown on the W-2 | Hostess pay is withheld by the establishment at "(pay − 5,000 yen × days) × 10.21%" |
| Consumption / sales tax | State sales tax varies by state and item | Voluntary tips lack consideration and are outside the scope of consumption tax. Service charges are taxable |
On the Japanese side, there are three key points.
- Gratuities received directly from customers are taxable. Tips received without going through your employer are reportable as miscellaneous income and the like, and for company employees, a tax return is required once they exceed 200,000 yen a year combined with other side income (the same framework as the 200,000-yen rule explained in our article on side-job tax returns). Because this is money received continuously in the course of work, it is treated as not falling under occasional income like prize money
- In the nightlife industry, withholding is already institutionalized. When a cabaret club or snack bar pays its hostesses or hosts, the establishment must withhold "10.21% of the amount remaining after deducting 5,000 yen × the number of days in the calculation period" (National Tax Agency Tax Answer No. 2807). Before being surprised by America taxing tips, note that Japan's nightlife trade has long been inside the withholding net. Details are in our article on tax returns for nightlife workers
- The "service charge" approach is also cleaner for tax purposes. In the National Tax Agency's published Q&A, voluntary tips lack a consideration relationship with the service and are outside the scope of consumption tax, while service charges added to the bill are part of the consideration and taxable. Book them as the establishment's revenue and distribute them to employees as salary — behind Japanese ryokan and hotels choosing a 10–15% service charge instead of tipping lies this practical clarity of accounting and tax treatment
Cases that involve people in Japan
- Paying tips on a trip or business trip to America: Tips are part of the price. At restaurants, 15–20% is the standard guideline; if the bill says a service charge is included, no extra tip is needed. In corporate expense claims, tips on overseas business trips are commonly treated as necessary business payments and included in travel expenses (since no receipt is issued, keep a memo of the amount and date)
- Working in America and receiving tips: If you work in an eligible occupation there, you may be able to use the deduction, but a Social Security number is required and married couples must file jointly. Also, income earned abroad while you remain a resident of Japan is in principle taxable in Japan as well (worldwide income taxation), so filing becomes complex, including adjustments for double taxation
- Receiving tips from inbound tourists: With the recovery of inbound travel, staff at hotels, restaurants and tour-guide workplaces increasingly receive gratuities from foreign guests. As noted in the previous section, these can be taxable in Japan, so keeping a record of amounts and dates lets you judge whether a return is needed
- Will "no tax on tips" come to Japan? There is no such proposal in Japan at present. In Japan, where tip income is exceptional to begin with, few people would qualify — and even in America, "fairness toward coworkers who receive no tips" is the biggest point of debate. Rather than whether to copy the system, what matters in practice is knowing whether the money you received is taxable
What to do today
What to do today
- If your service job sometimes brings tips or gratuities directly from customers, start keeping a memo of dates and amounts today (it becomes the basis for judging the 200,000-yen rule and for filing)
- If you work at a cabaret club, snack bar or similar, check your pay statements for the 10.21% withholding (if too much was withheld, you may get it back by filing a return)
- If you have a trip or business trip to America planned, check the local tipping norms and whether service charges are added automatically, and decide how you will keep notes for expense claims
FAQ
Q. Did tips in America really become tax-free?
A. Not completely. It is a time-limited measure: for the four tax years 2025 through 2028, people in eligible occupations can deduct voluntary tips of up to $25,000 a year in calculating federal income tax. Social Security and Medicare taxes still apply to tips, and the deduction phases out once income exceeds $150,000 ($300,000 for couples).
Q. How are the eligible occupations determined?
A. The final regulations of the Treasury Department and the IRS list more than 70 occupations across 8 fields including food service, hospitality, beauty and delivery. It is limited to occupations that customarily and regularly received tips on or before December 31, 2024 — a design that prevents switching to tipping after enactment as a tax dodge. Service charges added automatically by establishments are excluded.
Q. If I receive a tip (kokorozuke) from a customer in Japan, is it taxed?
A. Yes. Tips received directly from customers without going through your employer are reportable as miscellaneous income and the like, and company employees must file a return once such income exceeds 200,000 yen a year combined with other side income. Hostess pay at cabaret clubs and the like is subject to 10.21% withholding at the payment stage (after deducting 5,000 yen × days).
Q. How do Japan's "service charges" and tips differ for tax purposes?
A. A service charge is part of the price (consideration), so it is subject to consumption tax and becomes the establishment's revenue. A tip handed over voluntarily by a customer, by contrast, lacks a consideration relationship with the service, so it is outside the scope of consumption tax and is treated as income of the person who received it. This accounting and tax clarity is part of why Japan's lodging and restaurant industries have chosen the service-charge approach.
References (sources)
* Figures are based on materials published as of August 2026. Yen conversions use an approximate rate of $1 = 150 yen. The U.S. rules apply to U.S. taxpayers; the tax position of residents of Japan depends on individual circumstances. This article is general information for comparing systems; for individual filing decisions, consult a tax office or tax accountant.