Tipping the Tax Code: Who Really Benefits from the New Tip Exemption Bills?

By Khushi Nayak '26

---

In the U.S., tips are not a bonus that goes straight into the pockets of workers; the money is taxed just like regular income. Under current Internal Revenue Service (IRS) regulations, if a service employee makes more than $20 in cash tips a month, they are legally required to report it to their employer. (1) That means both the employee and their employer pay Social Security and Medicare taxes on that money, and income tax gets withheld just like with a paycheck.

However, a bill that recently passed changes that. Introduced in late May 2025, the House and Senate both came up with versions of the Big Beautiful Bill.  Originally, the Senate version of the proposal let workers keep up to $25,000 of cash tips tax-free. Although these tips were still reportable, they would not be federally taxed. (2) The House version went even further: it let workers deduct all tipped income, plus overtime earnings, with no cap at all. (3) Both versions excluded high earners making over $160,000, and both required payroll taxes like Social Security and Medicare to be withheld on non-exempt earnings.

On July 1, 2025, the Senate passed a revised version of the House’s bill by a narrow 51-50 vote, with Vice President JD Vance being the tie-breaking vote. (4) Then, it moved on to the House for final consideration, which passed by a 218-214 vote. On July 4, 2025, President Trump signed the bill into law, officially known as Public Law 119-21. (5) 

On paper, this sounds like a win for service workers. And in some ways, it is. Allowing restaurant servers, bartenders, hair stylists, and others whose income relies heavily on tips to keep more of what they earn could be a meaningful financial boost. The proposals also extend these benefits to workers in other tipped industries, like nail salons and barber shops, not just food service.

But dig a little deeper, and the picture gets more complicated.

First, these changes may weaken efforts to raise wages in the long run. Right now, employers are allowed to pay tipped workers as little as $2.13 an hour, assuming tips make up the difference. (6) If tip income becomes tax-free, there’s even less incentive for employers to raise base pay, especially when many labor advocates are pushing to eliminate the tipped minimum wage altogether. (7)

Then there’s the question of who benefits. While these bills are marketed as helping low-wage workers, the biggest winners are likely those earning the most in tips—employees such as bartenders in high-end venues or salon owners who get large cash gratuities. Most truly low-wage workers aren’t in jobs where tipping is common. And since tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit are based on taxable income, some workers could actually lose access to those benefits under the new system. (8)

There are other unintended consequences, too. If tips become tax-free, customers might start tipping less, assuming workers are already getting a better deal. More industries could also adopt tipping practices just to take advantage of the tax break, making tips mandatory instead of customary. And what happens to workers doing the same job in non-tipped settings? They’ll still pay full taxes, thus raising concerns about fairness across different professions.

It is also important to take into consideration the impact this bill has on the federal budget. Tax exemptions reduce government revenue. (9) According to groups such as the Peter G. Peterson Foundation, nearly all tax cuts, especially broad ones like this, add to the national debt unless offset elsewhere. (10) That in and of itself is not a small trade-off.

To be fair, the bill isn’t entirely bad. For many tipped workers who rely on inconsistent income, especially in cash-heavy environments, the tax break could offer immediate financial relief. It could also help employers recruit and retain staff in a sector still recovering from the pandemic-era labor shortages.

But those gains come with long-term trade-offs, and they’re not insignificant. The biggest beneficiaries are likely to be higher-earning service workers, not the lowest-paid Americans. It could unintentionally reduce access to key tax credits, undermine wage reform, and contribute to growing federal deficits. In the long run, it might deepen reliance on a flawed tipping system rather than fix what’s broken.

Therefore, while it may help a select few, when the pros are weighed against the cons, the balance tilts in the wrong direction. A better path forward would be to raise the federal minimum wage and ensure all workers (tipped or not) are compensated fairly.

In the end, while there are real, short-term benefits for some, the bigger picture raises serious concerns. These bills could make tipping even more central to worker pay, rather than addressing the core problem: stagnant wages. The federal minimum wage has been stuck at $7.25 since 2009. (11) Maybe the real solution isn’t carving out tax breaks, but

raising the floor for all workers.

Endnotes

1. “Tip Recordkeeping and Reporting | Internal Revenue Service,” Irs.gov, 2014, https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting.

2. Cruz, Ted, “S.129 - 119th Congress (2025-2026): No Tax on Tips Act,” Congress.gov, 2025, https://www.congress.gov/bill/119th-congress/senate-bill/129.

3. Justin Barnes et al., “How Will Federal Bills Eliminating Tax on Tips and Overtime Impact Employers? - Jackson Lewis,” Jackson Lewis, May 27, 2025, https://www.jacksonlewis.com/insights/how-will-federal-bills-eliminating-tax-tips-and-overtime-impact-employers.

4. “U.S. Senate: Votes to Break Ties in the Senate,” www.senate.gov, n.d., https://www.senate.gov/legislative/TieVotes.htm.

5. “One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors | Internal Revenue Service,” Irs.gov, 2025, https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors.

6. David Cooper and Nina Mast, “‘No Tax on Tips’ Will Harm More Workers than It Helps: Proposals in Congress and Now 20 States Could Encourage Harmful Employer Practices and Lead to Tip Requests in Virtually Every Consumer Transaction,” Economic Policy Institute, 2025, https://www.epi.org/blog/no-tax-on-tips-will-harm-more-workers-than-it-helps-proposals-in-congress-and-now-20-states-could-encourage-harmful-employer-practices-and-lead-to-tip-requests-in-virtually-every-co/.

7. Ibid.

8. Ibid.

9. Peterson Foundation, “No Taxes on Tips Would Drive Deficits Higher,” Peterson Foundation, April 14, 2025, https://www.pgpf.org/article/no-taxes-on-tips-would-drive-deficits-higher/.

10. Ibid.

11. David Cooper and Nina Mast, “‘No Tax on Tips’ Will Harm More Workers than It Helps: Proposals in Congress and Now 20 States Could Encourage Harmful Employer Practices and Lead to Tip Requests in Virtually Every Consumer Transaction,” Economic Policy Institute, 2025, https://www.epi.org/blog/no-tax-on-tips-will-harm-more-workers-than-it-helps-proposals-in-congress-and-now-20-states-could-encourage-harmful-employer-practices-and-lead-to-tip-requests-in-virtually-every-co/.