Bill to Make Tips Tax-Free Gains Momentum
On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (OBBB) into law.
The legislation extends tax reductions originally set to expire in 2025, making them permanent. It also introduces several new provisions, including tax-free overtime pay and an additional deduction for seniors.
According to the Congressional Budget Office (CBO), the law is projected to increase federal deficits by an estimated $3.4 trillion over the next decade.
No Tax on Tips Act – A Key Provision
One of the most notable features of OBBB is the No Tax on Tips Act, which has been passed by the U.S. Senate.
This provision allows tipped workers to deduct up to $25,000 from their taxable income, providing significant financial relief for millions of Americans employed in restaurants, hotels, and other service industries.
Currently, tips are treated as taxable income. Employers must withhold taxes, and workers are required to report their tips to the IRS.
If this provision becomes law, tips would still need to be reported but would be exempt from federal income tax, giving workers a larger share of their earnings.
Exclusions and Limitations
The measure applies only to tips voluntarily given by customers. It does not cover automatic service charges, such as mandatory gratuities for large groups.
In addition, the deduction excludes high-income professionals in Specified Service Trades or Businesses (SSTBs), including fields like law and finance, where income is primarily based on specialized skills.
Support and Reactions
The proposal has been welcomed by service industry workers and business owners. Supporters argue it will:
– Increase take-home pay for employees.
– Ease administrative burdens on small businesses.
– Provide targeted relief in industries that rely heavily on tipping.
Senator Ted Cruz of Texas, who co-introduced the bill with Senator Jacky Rosen of Nevada, stated:
“This is about fairness. These workers are putting in long hours and living paycheck to paycheck.
They deserve to keep more of what they earn.”
Senator Rosen added that in tourism-driven economies like Nevada, service workers are the “backbone of the economy” and should receive the respect and support they deserve.
What Comes Next?
While the bill has cleared the Senate, it must still pass the House of Representatives and receive the president’s approval to become law.
If enacted, the No Tax on Tips Act would mark a historic shift in the federal tax code, directly benefiting millions of hospitality and service workers across the United States.
