President Trump’s “no tax on tips” pledge is moving closer to becoming law as part of the Republican budget bill. The provision would create a tax deduction eliminating federal income taxes on tips for workers in traditionally tipped jobs who make less than $160,000 in 2025. Only tips reported to the employer and noted on a worker’s W-2 tax summary would qualify.
Payroll taxes for Social Security and Medicare would still be collected. The proposed deduction would expire after four years. The provision has widespread support from the public, bipartisan lawmakers, and employers who believe it will bring relief to the working class.
However, critics argue it will significantly cost the government while offering limited aid to those workers who need it the most. Experts argue that while some middle-income service workers may benefit from the tax break, it could heighten inequities. About a third of tipped workers make too little to owe income taxes and would not benefit from this tax break.
The National Restaurant Association is a strong backer of the “No Tax on Tips” provision. Sean Kennedy, executive vice president of public affairs for the association, calls it “sensible legislation” that could help workers and restaurant operators. The Culinary Workers Union in Nevada also supports the bill.
However, other groups representing workers express criticism. One Fair Wage, advocating for higher minimum wages, argues that the measure offers only moderate relief and is part of a tax package favoring the wealthy. Saru Jayaraman, president of One Fair Wage, emphasizes that the real focus should be on raising the minimum wage, not just on temporary tax relief.
The federal tax code currently requires that every tip be reported as income. Whether it’s a $20 bill handed to a host, a line filled in on a check, or a button pressed on a keypad, employees and employers are required to track and report every cent. This applies whether each worker keeps the tips or the money is pooled and redistributed.
Under the legislation being negotiated in the House, tip income would be exempt from federal income taxes. That amount would be subtracted from reported income as an “above the line” deduction on a tax return. That would reduce how much income tax is owed.
The tips would still have to be tracked and reported.
Provision impacts tipped workers’ income
There is debate over who would benefit from the measure, which applies to all tipped workers in the restaurant business, including not only servers but also baristas, food delivery drivers, and anyone holding out a payment screen after they have sold you food.
According to industry estimates, there are more than two million tipped restaurant workers in the United States. President Trump also promised to exempt overtime pay from federal income taxes. Both measures still face multiple hurdles.
House leadership was working throughout the day Wednesday to rally its members to pass a budget that includes a tax exemption for tips and overtime before the legislation will then head to the Senate. A separate bill that would exempt tips, but not overtime, from federal income taxes unanimously passed the Senate this week and will now need to be taken up by the House. These tax breaks have generated a rare coalition of support stretching across typical partisan divides, with unions, including the Teamsters, and industry groups, like the National Restaurant Association, advocating for the tax exemptions along with some Democrats.
At the same time, conservative-leaning think tanks and economists have raised concerns over how the exemptions would contribute to the deficit and potentially affect the job market by rewarding some workers over others. When Trump first raised the idea of ending taxes on tips, several influential Republicans were skeptical, citing rising national debt and questioning whether it would be fair to earners who don’t make tips. While some workers would see significant increases in their after-tax income, the wider impact on the economy would be relatively limited, economists said.
Tipped workers make up about 2.5% of the workforce, and about 12% of hourly workers clock some overtime each year, according to data. As many as 40% of tipped workers already don’t make enough money to have to pay federal income tax on any of their earnings, the Yale Budget Lab found. The tax exemption would apply only to federal income tax, so workers would still have to pay Social Security and Medicare taxes, along with any state or local taxes.
Both tax exemptions are structured as deductions that workers would claim when they filed their taxes the following year. That means employers would still withhold money for tax payments on tips or overtime through their regular paychecks, but the income would be deductible from their final tax bills. The House and Senate bills include some limits on tip exemptions that would make it more difficult for employers to try to manipulate the system.
It would also exclude higher-income earners making more than $160,000 and would limit the amount of tips that could be deducted from a yearly tax return to $25,000. But the measures would still come at a cost to the federal budget. The exemption for overtime in the House budget bill would result in $124 billion in lost tax revenue compared to current policy, and the tax break on tips would reduce tax collections by $40 billion, according to the Congressional Budget Office.
Under the current legislation, the tax breaks would expire in 2028. Opponents have also argued that the exemptions would distribute the tax burden unfairly, with a worker who is paid an hourly wage, like a janitor, having a higher tax bill than a bartender working at the same restaurant. It could also shift the demand for tipped jobs and those with overtime, creating shortages of workers in other areas.
Reducing taxes on overtime could also lead more employees to be willing to work overtime, which could mean fewer jobs overall in the labor market in certain sectors if employers are able to get additional hours out of their existing staff.
