‘No Tax on Tips’ Serves Up Relief to Service Workers, Sparks Debate Over Fairness and Cost

WASHINGTON – A new law is providing significant financial relief for many of America’s tipped workers. Under the measure, employees can now exclude up to $25,000 in tips from federal income taxes, a change championed by President Trump.

For the roughly five million employees who rely on tips as a key part of their income, the measure is a welcome reprieve. 

From busy restaurants to bustling salons and rideshare gigs, tips have long been a critical part of workers’ livelihoods. Now, employees can keep more of what they earn, potentially adding hundreds of dollars per month to their take-home pay.

“The American people are overtaxed. No doubt about it, and they need a tax cut. This is going to help them. The problem is, it’s short-term,” Dan Pilla of Taxhelponline.com said.

The idea gained momentum during the 2024 campaign when then-candidate Donald Trump spoke with a Nevada waitress. 

For decades, tips were fully taxable, often cutting into already slim margins. In July, Republican lawmakers included the measure in the “Big, Beautiful Bill,” which passed along party lines. Although the law exempts tips from federal income tax, payroll taxes for Social Security and Medicare will still apply.

“This opens up a huge amount of new opportunities for people that otherwise may not have gone into that service industry and even managing a business of that establishment like a restaurant,” explained economist Christian Briggs.

Advocates argue that the measure could make service jobs more appealing in an industry marked by high turnover. Workers and supporters emphasize that the law opens opportunities for those who might otherwise avoid service careers or management positions in restaurants and similar establishments.

Not everyone is celebrating. Critics, including Democrats, contend that the exemption gives tipped workers an advantage over other low-income groups, such as retail and warehouse employees.

“The cap on that is $25,000 while you’re jacking up taxes for people making less than $50,000,” insists Rep. Alexandria Ocasio-Cortez (D-NY).

Concerns have also been raised that the policy reinforces a culture of tipping that some Americans already find excessive, while sidestepping broader issues of fair wages.

Rep. Dina Titus (D-NV) said, “It’s going to have much less impact than people were hoping for.”

Experts also warn of long-term costs. By some estimates, the tax break could increase the federal deficit by as much as $200 billion over a decade if not offset by spending cuts. 

Enforcement is another hurdle, as federal agencies must now devise methods to track and verify tips, a challenge in cash-heavy industries that could undermine the law or create loopholes.

“This is yet another essential giveaway that is financed through debt,” warned Mark Hamrick of Bankrate.com.

The law is set to expire in 2028 unless Congress extends it. How long the benefits last and whether the policy will be renewed may depend on congressional control and public perception, particularly among those who feel the measure favors certain workers while leaving taxpayers to foot the bill.

For now, many tipped employees are poised to enjoy extra cash in their pockets, even as debates continue over the broader economic and social implications.