For Trump's ‘no taxes on tips,' the devil is in the details

Yahoo

10-06-2025

President Donald Trump's promise to eliminate taxes on tips may sound like a windfall for service workers — but the fine print in Congress' latest tax bill tells a more complex story.
Right now, Republican lawmakers are advancing the 'One Big Beautiful Bill Act' — a sprawling, 1,100-page proposal that aims to change everything from tax incentives for electric vehicles to health care. It also includes a proposal to end taxes on tips, which could potentially affect around 4 million American workers. The Senate has recently passed its own version – the No Tax on Tips Act.
The idea started getting attention when Trump raised it during a 2024 campaign stop in Las Vegas, a place where tipping is woven into the economy. And the headlines and press releases sound great — especially if you're a waiter, bartender or anyone else who depends on tips for a living. That may be why both Democrats and Republicans alike broadly support the concept. However, like most of life, the devil is in the details.
I'm a business-school economist who has written about tipping, and I've looked closely at the language of the proposed laws. So, what exactly has Trump promised, and how does it measure up to what's in the bills? Let's start with his pledge.
Back in January 2025, Trump said, 'If you're a restaurant worker, a server, a valet, a bellhop, a bartender, one of my caddies … your tips will be 100% yours.' That sounds like a boost in tipped workers' income.
But when you look at the current situation, it becomes clear that the reality is far more complicated.
First, the new tax break only applies to tips the government knows about — and a lot of that income currently flies under the radar. Tipped workers who get cash tips are supposed to report it to the IRS via form 4137 if their employer doesn't report it for them. If a worker gets a cash tip today and doesn't report it, they already get 100% of the money. No one really knows what percentage of tips are unreported, but an old IRS estimate pegs it at about 40%.
What's more, the current tax code defines tips only as payments where the customer determines the tip amount. If a restaurant charges a fixed 18% service charge, or there's an extra fee for room service, those aren't tips in the government's eyes. This means some tipped workers who think service charges are tips will overestimate the new rule's impact on their finances.
The 'Big Beautiful Bill' would create a new tax code section under 'itemized deductions' This area of the tax code already includes text that creates health savings accounts and gives students deductions for interest on their college loans.
What's in the new section?
First, the bill specifies that this tax break applies just to 'any cash tip.' The IRS classifies payments by credit card, debit card and even checks as 'cash tips.' Unfortunately for workers in Las Vegas, noncash tips, like casino chips, aren't part of the bill.
While the House bill limits the deduction to people earning less than US$160,000 the Senate bill caps the deduction to the first $25,000 of tips earned. Everything over that is taxed.
Second, the current House bill ends this special tax-free deal on Dec. 31, 2028. That means these special benefits would only last three years, unless Congress extends the law. The Senate bill does not include such a deadline.
Third, the exemption is only available to jobs that typically receive tips. The Treasury secretary is required to define the list of tipped occupations. If an occupation isn't on the list, the law doesn't apply.
I wonder how many occupations won't make the list. For example, some camp counselors get tips at the end of the summer. But it's unclear the Treasury Department will include these workers as a covered group, since counselors only make up a proportion of summer camp staff. Not making the list is a real problem.
And while the new proposal gives workers an income tax break, there's nothing in either bill about skipping FICA payments on the tipped earnings. Workers are still required to contribute slightly more than 7% in Social Security and Medicare taxes on all tips they report, which won't benefit them until retirement. This isn't an oversight — the bill specifically says employees must furnish a valid Social Security number to get the tax benefits.
There are a few other ways the legislation might benefit workers less than it seems at first glance. Instituting no taxes on tips could mean tipped employees feel more pressure to split their tips with other employees, like busboys, chefs and hosts. After all, these untipped workers also contribute to the customer experience, and often at low wages.
And finally, many Americans are tired of tipping. Knowing that servers don't have to pay taxes might make some to cut back on it even more.
The specifics of any piece of legislation are subject to change until the moment Congress sends it to the president to be signed. However, as now written, I think the bills aren't as generous to tipped workers as Trump made it sound on the campaign trail.
Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.