The no-tax-on-tips rule in the One Big Beautiful Bill Act puts extra cash—up to $1,800 a year—into the pockets of 4 million tipped workers. It’s a win for servers and bartenders.
On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act, a sweeping tax package that includes a temporary no-tax-on-tips provision, offering up to a $25,000 annual federal income tax deduction for tipped workers from 2025 through 2028. The measure, a key campaign promise, aims to provide financial relief to millions in industries such as food service and beauty, but critics warn it may favor specific sectors and fall short for low-income workers.
The provision allows employees and self-employed workers—reported on Forms W-2, 1099, or 4137—to deduct up to $25,000 in qualified tip income. It covers occupations like servers and hairdressers, with the IRS set to define eligible roles by October 2025. The deduction phases out for individuals earning over $150,000 or joint filers above $300,000. Notably, it excludes payroll taxes (Social Security and Medicare) and state or local income taxes, and expires in 2028 unless extended.
The White House estimates 4 million tipped workers—about 2.5% of the U.S. workforce—could benefit, with average annual savings of $1,675 to $1,800 per eligible household. Workers are advised to consult financial advisors to adjust W-4 withholdings to maximize benefits.
The provision could boost local economies by increasing workers’ disposable income, but critics highlight potential federal revenue losses and favoritism toward industries like food and beverage, hospitality, and personal services. Ernie Tedeschi, an economist at Yale’s Budget Lab, noted, “The issue is that there aren’t a lot of tipped workers in America. Even among low-wage workers, it’s only 5% that are tipped workers.” Martha Gimbel, executive director at the Budget Lab and former Biden administration official, added, “Very low-income Americans are not going to benefit from this, largely because they already have little to no taxable income.”
Despite bipartisan support, the provision has sparked debate over its 2028 expiration. Garrett Watson of the Tax Foundation said the $25,000 cap and income phaseout “helps to sort of carve out some of the very high earners who may be incentivized to recharacterize their income tips inappropriately.”
Businesses face new IRS reporting requirements, necessitating enhanced tip-tracking systems. The IRS offers 2025 transition relief for approximate reporting. Michelle Korsmo, president and CEO of the National Restaurant Association, said, “The inclusion of the No Tax on Tips and No Tax on Overtime provisions recognizes the value of our dedicated workforce. More than two million tipped servers and bartenders stand to benefit, while the overtime measure rewards the commitment of over 13 million hourly team members across the sector.”
Limitations remain: Payroll and state taxes still apply, and self-employed workers are capped at net business income. Bartender Prince Chiketah, whose tips comprise 80% to 90% of his income, said, “That would be great.” Arizona bartender Megan Rothgeb added, “If a server at a bar is making less than minimum wage as their salary, you’re going to then take the money they get for doing a good job?”
The provision’s success hinges on IRS guidance and potential extensions beyond 2028, positioning it as a pivotal yet contentious element of tax policy reform.
Set to end in 2028, its future hinges on IRS rules and whether Congress keeps it going.