No Tax on Tips Meaning & Implications for Restaurants Following ‘Big Beautiful Bill’ H.R.1.

Throughout the 2024 US presidential campaign, we heard both parties float the idea of “no tax on tips.” But what does “no tax on tips” mean in practice? What will a policy change on tip taxation mean for restaurant owners and restaurant workers?

Well, now, we’re closer to an answer. As of this writing (July 3, 2025), the US House of Representatives voted to pass the “Big Beautiful Bill” H.R.1. The 900-page federal spending bill does … a lot. One of those is a provision that allows tipped workers to deduct up to $25,000 in tips from their federal income tax.

This article takes a comprehensive look at all the “no tax on tips” legislation and lays out how no taxes on tips would work, along with the benefits and drawbacks, and answers some frequently asked questions.

What no tax on tips means in the 2025 spending bill

“No Tax on Tips” is a legislative movement aimed at reducing federal income taxes and, in some cases, payroll taxes that tipped workers and their employers pay on tips. The phrase “no tax on tips” originates from the title of Senate Bill 4621, the “No Tax on Tips Act,” which was introduced in the US Senate in June 2024 by Senator Ted Cruz.

Within weeks, two related bills were introduced in the House of Representatives: the House version of the No Tax on Tips Act (House of Representatives Bill H.R.8941) and House of Representatives Bill H.R.8785, also known as “The Tax Free Tips Act.”

Today, the 2025 spending bill officially passed through the House, bringing to fruition the no tax on tips provision that says qualifying tip and tipped workers can deduct up to $25,000 in qualifying cash tips from their federal income tax for tax years 2025 through 2028.

There’s some vague language in that, so let’s clear some things up.

A “qualifying tip” is:

• Paid by choice, with no consequence for nonpayment.
• Not the subject of negotiation.
• Determined by the payor (those 10%, 15%, 20%, 20%, or skip options on your POS).

Importantly, service charges and gratuity don’t count, so workers aren’t allowed to claim deductions on any parts of these that are tipped out. Furthermore, the bill broadly identifies a “cash tip” as paper cash or charged on a card, but it doesn’t include tips in the form of physical goods, like movie tickets or gift cards, the value of which would be taxed as normal.

A “qualifying tipped worker” is any tipped worker whose modified adjusted gross income is less than $150,000, or $300,000 for those filing jointly. The deduction cap goes down $100 for every $1,000 over the income threshold.
The provision doesn’t change how tips get reported on your workers’ W-2s. But this is where things get sticky. The deduction assumes all cash tips are getting reported consistently and therefore qualify. So if you have workers who divide up cash tips at the end of a shift without reporting it in the close-out process, they’re not getting taxed on those amounts anyway.

And as New York Congresswoman Alexandria Ocasio-Cortez pointed out, the federal spending bill makes sweeping, billion-dollar cuts to healthcare and other social services. So the deduction some workers claim now doesn’t equal or exceed the rising costs of living.

How no tax on tips works

Both the Senate and House versions of the No Tax on Tips Act function in the same way. Both bills establish a tax deduction for tipped workers. So, tipped workers would still report their tips and file their state and federal taxes, but they would deduct all of their “cash tips” from their gross income before calculating their federal income tax.

This type of deduction is called an “above-the-line” tax deduction. The worker’s taxes would then be calculated based on only their base wages without tips.

How the Tax Free Tips Act is different

The House’s Tax Free Tips Act of 2024 is slightly different from the other two bills. This bill exempts tips from both payroll and income taxes. This would reduce the administrative burden on independent restaurant owners and allow tipped employees to keep more of their tips.

However, without payroll taxes, there is a chance that tipped workers could make fewer contributions to Social Security and Medicare through FICA tax contributions, which could have repercussions when they reach retirement age.

Who no tax on tips affects

Research by the Yale University Budget Lab estimates that tipped workers account for 2.5% of the US working population. Additional Budget Lab research finds that over 50% of tipped workers work in the restaurant industry. So, any adjustments to tip taxation would have a huge impact on the way restaurants function. And, in reality, the deduction might not be as impactful to the greatest number of workers.

Ernie Tedeschi, the director of economics at the Yale Budget Lab, told CBS MoneyWatch that middle- to high-earning workers stand to gain the most, but it won’t mean much to the lowest earners who don’t have a tax liability. Instead of a deduction, Tedeschi advocates for a higher minimum wage among the tipped workforce.

No tax on tips status

Not to be confused with the “Big Beautiful Bill,” which is a spending bill that doesn’t make permanent change, the other bills updating tip taxation were introduced, read by the relevant congressional chamber, and are being considered separately by specialized committees in each chamber.

These committees may hold hearings to gather opinions from experts or the general public. They’ll also want to see Congressional Budget Office (CBO) projections of the bills’ impact if enacted. 

Based on the additional information they develop, the committees may amend the bills before sending them to the Senate Majority Leader or Speaker of the House. Then, it is up to the leaders of each chamber to bring the bills to a vote. Both chambers must vote to pass the same version of the bill before it is sent to the President for signature. So, there is still a long way to go before any of these bills become law. 

As of July 3, 2025:

• S.4621 (No Tax on Tips Act, sponsored by Sen. Ted Cruz [R-TX]) has only been read and referred to the Senate Committee on Finance. 
• H.R.8941 (No Tax on Tips Act, sponsored by Rep. Byron Donalds [R-FL-19]) has been introduced and referred to the House Ways and Means Committee.
• H.R.8785 (Tax Free Tips Act of 2024, sponsored by Rep. Thomas Massie [R-KY-4]) has been introduced and referred to the House Ways and Means Committee.

These bills are about 20% of the way to eventually becoming law. Congress passes only a small fraction of the bills that are introduced, typically between 3% and 10% of the bills introduced each session. I will update this article as these bills move — or don’t move — through Congress. 

No tax on tips origins

The idea of not taxing tips is not new. In fact, the US has only been taxing tips for the past 42 years, since the passage of 1982’s Tax Equity and Fiscal Responsibility Act (TEFRA). Before TEFRA passed, tips were commonly seen as a form of tax-free gift.

So, there is some history behind not taxing tips. Many European countries, like Germany, also do not tax tips. However, in those countries, tips typically account for a much smaller percentage of tipped workers’ pay than in the USA. 

The current conversation about not taxing tips in the US started during the 2024 presidential campaign. Both President Trump and Vice President Harris spoke about updating the tax code to stop taxing tips. The first of these three bills was proposed in the House after President Trump spoke about not taxing tips at a campaign rally.

No tax on tips benefits

These bills still have a long way to go before they become law. If they do pass, however, there are some assumed benefits to not taxing tips:

• Tipped workers would keep more of their money. 
• Restaurant owners could reduce administrative work (and costs) and potentially save on payroll tax payments.
• Tax-free tips could reduce the restaurant labor shortage by increasing interest in tipped restaurant work.

Some major restaurant industry players are interested in the potential positive changes that not taxing tips could have in the restaurant industry. The National Restaurant Association came out in favor of the No Tax on Tips movement and listed these benefits in an August 2024 statement:

“Exempting tips from income tax could benefit the restaurant industry by reducing the administrative burden on small business owners and supporting workers who rely on tips to make a living.”

It is also possible that removing taxes on tips will encourage workers to pursue tipped restaurant jobs as either part-time or full-time jobs. While the restaurant worker shortage is less dramatic in 2024 than it was in 2023, the industry regularly experiences high turnover and many job vacancies.

So, even if tipped work only becomes appealing for seasonal jobs in the summer and holiday months, every bit of worker is welcome. 

No tax on tips drawbacks

Not everyone is convinced that removing taxes from tips will be positive. There are some very real drawbacks to consider.

• Consumer backlash could reduce tip amounts. 
• Not taxing tips could decrease worker contributions to Social Security.
• Overall restaurant wages could stagnate.
• Not taxing tips favors tipped workers over non-tipped workers.

The first major downside concerns customer behavior. Many restaurant owners and workers I speak with are concerned about public backlash. There has been a lot of media coverage about “tipflation” in recent years, and consumer sentiment about tipping has never felt more precarious. The first concern I hear from everyone is the fear that patrons will dramatically lower their tips or choose not to tip at all. 

Workers are also concerned that not paying taxes on their tips will reduce their Social Security contributions, leaving them with insufficient funds when they retire. Many restaurant workers wonder if not taxing tips will affect their ability to show proof of income when they need car loans or mortgages. However, the current structure of these bills is unlikely to pose a problem.

Untaxed tips can be seen as a form of raise for tipped workers. Thus, there will be little incentive to increase worker wages to match the rising costs of living. In the long run, not taxing tips could actually cause tipped wages to stagnate. 

The federal spending bill excludes workers in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services. So, tax policy analysts also point out that not taxing tips would favor tipped workers over other, non-tipped workers who earn similar wages.

For example, say a non-tipped administrative assistant earns $48,000 in annual wages, and a tipped server also earns $48,000 annually. The server would not be taxed on their tips, and so would get a tax break that is not available to the assistant.

No tax on tips: Reddit’s take

In a word, restaurant and general consumer Reddit is skeptical of new bills, with few (if any) in favor of the provision in the spending bill. Overall, the subreddits focused on restaurant owners and workers doubt that the No Tax on Tips Act will actually pass. “This will never happen, so don’t worry about it” is a phrase that appears many times across related Reddit threads. 

Many Reddit restaurant workers also express the opinion that the No Tax on Tips Act is actually the first domino in a chain of future legislation that will ultimately classify corporate bonuses and other wage types as “tips,” thus making those wages untaxed. 

Underlying the general skepticism is the feeling that the No Tax on Tips Act isn’t really about restaurant workers, and even if the bill passes, they don’t expect it to help restaurant workers much. The NY Times notes that this is possible, writing in a recent article, “By one definition of ‘tip,’ many Americans could reclassify their earnings to avoid taxes.”

As the largest tip-reliant workforce in the US, restaurant workers also fear they will bear the brunt of any backlash, and that backlash will be expressed by customers tipping less. Many commenters are also concerned that changes to tip taxation and reporting will impact their ability to show proof of income when tipped workers apply for loans or mortgages.

Some workers worry about the impact on Social Security contributions and whether the changes would reduce their Social Security incomes when they reach retirement age. On the consumer side, tipping sentiment from Reddit contributors runs the gamut, from “I won’t tip because servers are overpaid” to “I won’t tip anymore because servers should just earn more.”

No tax on tips FAQs

The No Tax on Tips landscape is still taking shape. These bills can also change in the committee phase. These are the most common questions I’m hearing right now.

Last bite

The three No Tax on Tips Acts still have a long way to go before they become law and may never cross the finish line. But the passing of the no-tax provision in the 2025 “Big Beautiful” spending bill could accelerate that. If more bills pass in their current forms, the results will be mixed for restaurant owners and workers. While tipped workers will keep more of their tips, there could be implications for future Social Security benefits. 

A lot will depend on what happens in Congressional committees and if these bills ever make it out of committee to a full vote. If you or your staff have concerns about how the proposed bill will affect your business, contact your Senators and Congressmen. Now is the time when your voice can have an impact.