With the tip tax deduction and FICA tip tax credit expansion happening as part of HR1 (One Big Beautiful Bill) in July of 2025 we have been getting a lot of questions here at Kopsa Otte.
If you are not a Kopsa Otte client, we hope that your accountant has talked to you about these great new tax updates available to those in the Beauty Industry.
As an owner with employees there are some important things that you need to be aware of. First, you are responsible for educating your employees on tips and requiring that they report their tip income to you so that you can include it in payroll. If you are not doing this, I suggest you work on a system now to make it happen. We have a compliance webinar available at no cost if you. Only those tips reported, and FICA matched will be eligible for the FICA tip tax credit (owner) and/or the $25,000 tip Federal deduction (employee). Reach out to us at connect@kopsaotte.com to request access to the compliance webinar.
As an employee that receives tips there are also some important things you need to be aware of. Tips on the W-2 are those that will be eligible for the $25,000 tip deduction. In 2025, the IRS is giving some grace in that you may be able to use a paystub detail to support your tip deduction. There are income phaseouts and this deduction is temporary. Ask your accountant if you qualify.
If you are an employee and an owner, you may qualify for both the FICA Tip tax Credit and the tip deduction.
As a self-employed producer that receives tips there are some important things you need to be aware of. As you know, your income including tip income is subject to self-employment tax. This isn’t changing. However, in the past you likely have not been separating tip income from regular service/retail income. The tip deduction is only on tip income. Separating your tips from service/retail income will provide the documentation needed for the up to $25,000 tip deduction. In 2025, the IRS is giving some grace for documentation. There are income phase-outs and this deduction is temporary. Ask your accountant if
you qualify.
There are many other important factors to consider for the FICA Tip Tax Credit and the Tip Deduction. If you are a Kopsa Otte client, you have access to our team to ask questions. Please reach out. If you are not a client, please contact your CPA. If you are interested in being a Kopsa Otte client, please inquire by emailing us at connect@kospaotte.com. We have limited room available but would love to start that interview process with you today.