What no tax on tips means for American workers
Tipped workers in the U.S. could see significant changes to their taxes after Congress approved President Trump’s legislative agenda on Thursday. This week, the GOP-controlled Senate and House narrowly passed the One Big Beautiful Bill Act — a massive spending and tax package that creates limited and temporary tax exemptions for tips, among other tax cuts.
Once the provision goes into effect, workers will be able to deduct $25,000 in tips annually from their taxable income. After that, tips will be federally taxed.
“If you look at the data on tipped income, that would cover the majority of individuals earning tips in the United States,” said Garrett Watson of the Tax Foundation, an organization that advocates for simplifying the tax code in pursuit of economic growth. “So, it’s still pretty generous for most workers.”
If a worker makes more than $150,000 a year, though, their tipped income will start to be taxed.
“That helps to sort of carve out some of the very high earners who may be incentivized to recharacterize their income tips inappropriately,” Watson said.
A chief concerns among tax experts during the campaign was that hedge fund managers and lawyers would turn themselves into “tipped workers” in order to skirt federal taxes altogether.
The package also restricts tax-free tips to worker at “an occupation which customarily and regularly received tips” — but the text does not define these jobs individually.
“It will ultimately fall, at the end of the day, to Treasury and the IRS administers and for this consistent with the language,” Watson said.
The law, if not extended by Congress at a later date, will phase out at the end of 2028 — near the end of Trump’s presidency.
A political promise kept
Trump campaigned heavily on the “no taxes on tips” policy during the 2024 presidential race. In June, Trump said he got the idea from a Las Vegas tipped-worker. By August, former Vice President Kamala Harris also campaigned on eliminating taxes on tips.
With the bill heading to the the president’s desk, tipped workers could see their federal taxes shrink “as soon as later this year” depending on the speed of the IRS and Treasury Department, according to Watson.
“Especially going into next season, folks will see that adjustment in their taxes and a potential refund for any withholding on that tipped income,” Watson said.
The “no tax on tips” idea had bipartisan supporters in Congress including Sen. Ted Cruz, R-Texas, Sen. Jacky Rosen, D-Nev., Rep. Vern Buchanan, R-Fla., and Rep. Steven Horsford, D-Nev.
In addition to disagreements over the specifics of the no-tax-on-tips policy, Democrats in Congress universally opposed the package, largely citing cuts to Medicaid. A government analysis predicts the law will strip health insurance from more than ten million Americans over the next decade.
“There is no spin for the human suffering they’re causing,” Horsford said in a statement Thursday. “This is Robin Hood in reverse, and Republicans would be wise to remember that they won’t have the last word here — the American people will, on Election Day.”
On Monday, Horsford offered an amendment to make no taxes on tips permanent, instead of temporary. His amendment failed.
What does no taxes on tips mean for Americans?
While it dominated the campaign and messaging from the Trump White House, Executive Director at the Yale Budget Lab Martha Gimbel — a former Biden administration official — said she doesn’t think this law will have a significant impact on American workers and wages.
“Overall, tipped work is a really small sliver of the labor market,” Gimbel said. “It’s about two and a half percent of all employment.”
Moreover, Gimbel said the policy won’t affect the taxes of lower-income tipped workers.
“Very low income Americans are not going to benefit from this, largely because they already have little to no taxable income,” Gimbel said. “And so what you are largely seeing is that this provision will benefit people who are in the middle, upper-middle income brackets.”
Gimbel said middle-class tipped workers and their employers will reap the most benefits and may take advantage of the new tax exemption.
“Let’s take a hairdresser,” Gimbel said. “It would be very plausible to me that they might lower the cost of a haircut, but say that they expect the tips to go up. We’ll see in years to come if that happens.”
For Gimbel, the no tax on tips law should be taken in the broader context of the entire bill.
“Our analysis suggests that if your income is above 3.3 million, you get a tax cut of over 118 thousand,” Gimbel said. “And if you’re in the bottom quintile, once SNAP and Medicaid cuts are taken into account, on average, you’re losing $560.”
“It’s a really regressive bill and it’s incredibly expensive,” she said.
What should tipped workers do now?
Tipped workers should wait for more guidance from the IRS and the Treasury Department, Watson said.
Once new guidance is released, tipped workers could update their W-4 withholdings to reflect the newly tax-exempt tips. Or workers can wait for a refund when they file in the spring.
“I do expect for a lot of folks to use software,” Watson said. “This will be quickly incorporated into next year’s filing season and will be something that’s that’s asked for. But that’s always something to watch for as well, just to make sure it’s properly accounted for.”
Watson also noted that many tipped workers hold multiple jobs. He cautioned these workers that only $25,000 of their annual tips will be tax free — even across multiple tipped jobs.