No Tax on Tips Passes in Trump's Big Beautiful Bill: What to Know
The proposal, part of the One Big Beautiful Bill Act, would enable millions of tipped workers, including servers, bartenders, and hairdressers, to deduct their tipped income from their taxable wages.
While the full repeal of tip taxation was a signature campaign promise for Trump, the Senate's version caps annual deductions at $25,000 and phases out the benefit for higher earners.
The policy reflects one of Trump's central campaign pledges in 2024 and has gained bipartisan support. Estimates from the White House's Council of Economic Advisers suggest that eligible workers could see their take-home pay rise by an average of $1,675 per year.
Critics, however, have raised concerns about who actually benefits from the change. Some experts and labor advocates warn that the majority of tipped workers already earn too little to owe federal income tax, which could mean the deduction disproportionately aids higher earners in tipped professions rather than low-wage workers.
The "no tax on tips" provision within the Senate version of the One Big Beautiful Bill Act allows tipped workers to deduct tip income from their federal taxable income, up to $25,000 annually.
The deduction phases out for individuals earning more than $150,000 and couples earning over $300,000.
The deduction, if signed into law as part of the bill, applies to tax years 2025 through 2028 and does not eliminate payroll taxes for Social Security and Medicare, nor does it affect state or local tax obligations.
A full list of eligible occupations for tip deductions will be released within 90 days of the bill becoming law.
Supporters argue that the approach provides immediate benefits for working-class families and will help offset living costs amid ongoing inflation, with the White House saying that it will offer a "pay boost for millions" of working Americans.
Critics highlight that the benefit may be limited because workers earning low wages in tipped jobs are often already exempt from paying federal income tax due to their overall income level.
Data from the Yale Budget Lab shows that about 4 percent of workers earning less than $25 an hour receive tips.
Economists have also flagged potential negatives. The Tax Foundation, an independent tax policy nonprofit, said in April of this year that the policy could introduce "severe horizontal inequity in the tax code," with two workers earning the same amount in different industries having vastly different tax obligations.
The White House said in a post on X, formerly Twitter: "The One Big Beautiful Bill delivers the largest tax cut in history for middle- and working-class Americans."
Joseph Camberato, CEO at NationalBusinessCapital.com, told Newsweek: "I think it's a win for the people who actually live off tips. This could put real money back into the pockets of restaurant servers and others in the service industry, and that money gets spent, which helps the economy.
"It's for the 1.8 million restaurant servers who rely on tips to pay their bills. For them, not getting taxed on that income is a big deal. This policy targets the right group and gives them a meaningful raise, basically overnight."
Abir Mandal, senior policy analyst at the Tax Foundation: "The trend of tax exemptions on tips, overtime, and bonuses may sound like a win for workers, but it is a shortsighted fix with long-term drawbacks. It creates winners and losers among workers with equal incomes, distorts labor markets, and undermines public finances—all while failing to help the American workers struggling the most."
The bill returns to the House of Representatives before heading to Trump's desk for his signature. If enacted, the policy will take effect for the 2025 tax year and remain in place through 2028.
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