On July 4, the One Big Beautiful Bill Act was signed into law, restructuring, among other monumental changes, the way tips would be taxed for service workers. The law is the fulfillment of a campaign promise President Trump made nearly exactly a year prior in a campaign speech in Las Vegas on July 9, 2024. “For those hotel workers and people that get tips, you’re gonna be very happy,” he said at the time. “Because when I get to office, we are going to not charge taxes on tips.”
Although it's colloquially referred to as “no tax on tips,” the legislation isn’t as straightforward as simply eliminating all taxes on gratuities. Section 70201 of the new law states, “There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual.”
But “there's a limit of how much in tips you can deduct for purposes affecting income tax—it’s up to $25,000,” explains Garrett Watson, director of policy analysis at the Tax Foundation, a nonpartisan tax-policy-focused think tank. There are income restrictions on the deduction too. “If you have income above $150,000 if you're single, or $300,000 if you’re filing jointly, the value of this deduction phases out,” Watson says.
The idea of a tip-based tax deduction received widespread support from both sides of the aisle—Kamala Harris endorsed the policy on the campaign trail as well—but now that it’s law, how might it impact servers? The tipping system has been in the spotlight in recent years, criticized for its racist foundations, and increasingly unpopular with diners who have begun to feel tip fatigue. This new legislation is positioned as a step forward for a system that’s long needed improvements. Could it have a significant impact on servers’ and bartenders’ finances, or is it all smoke and mirrors wrapped up in a shiny populist talking point?
Lessening the tax burden on tipped workers looks good on paper, but the research shows that the effect will be relatively limited. Research from the Tax Policy Center shows 40% of households with tipped workers would receive no benefit at all. On average, the same report concluded that tax savings would come out to $1,800 a year, or $35 a week.
For some servers, any savings is a boon. “Every dollar goes far,” says Louis Leffler, a server in Denver. “It helps me give my kid a music class, or a swimming class.”
Restaurant industry advocates have other concerns. Saru Jayaraman, president of One Fair Wage, a national nonprofit that advocates for the abolition of the subminimum wage, calls the “no tax on tips” law a red herring. Many tipped workers, she says, don’t earn enough money to have to pay federal income tax. Data from the Yale Budget Lab, a nonpartisan policy research center, support Jayaraman’s position. According to a June 2024 report, 37% of tipped workers had incomes low enough that they faced no federal income tax in 2022. The same report estimates that just 2.5% of the workforce is in tipped occupations. Both figures suggest untaxed tips would have limited benefits for tipped workers and certainly for the broader American workforce.
And while the bill holds very limited benefits for tipped workers, it also lays out major cuts to both SNAP and Medicaid benefits, both social services that restaurant workers in particular must lean on, according to a recent report from One Fair Wage. SNAP faces $186 billion in funding cuts, while Medicaid will be cut by nearly $1 trillion.
Data published by the Center on Budget and Policy Priorities shows that 10% of total SNAP participants work in restaurants, the largest single industry among SNAP beneficiaries. More than 1.5 million restaurant and food service workers rely on Medicaid. “If we want to actually benefit workers,” says Raeghn Draper, executive director of the CHAAD project, a Chicago-based restaurant worker advocacy group, “let’s give them something that’s permanent: Let’s raise wages, let’s have universal health care.”
The National Restaurant Association, a powerful trade association that lobbies on behalf of restaurant owners, takes a different stance. When asked for comment, a spokesperson said in an email that “tipped servers take home a median of $27 an hour” nationally, while the highest-paid make “more than $41 per hour.” These figures come from a survey conducted by the NRA itself. As reported in The New Yorker, “no economist would regard a lobbying group as a reliable source for such information.”
Notably, the NRA’s figures don’t line up with numbers from the Bureau of Labor Statistics, which represents a broader range for all tipped workers. Those statistics hold that the median hourly wage for tipped workers, including gratuity, is $16.23. At 40 hours a week, with consistent hours every week of the year (a rarity for servers), that would mean a yearly wage of under $34,000. It’s true that some servers can indeed make a fair wage in the current system, but, statistically, it’s the exception, not the rule.
In interviews, many servers expressed concerns about what the deduction meant for the industry more broadly.
Quinton Soemardi, who works at Neng Jr.’s in Asheville, North Carolina, likely won’t see big savings from the new deduction. “I don’t imagine it's going to make a huge difference for me,” he says. Though Soemardi earns a salary above the median wage, he sees issues on a broader scale. “My big concern is the political manipulation—the framework around it.” The deduction, he says, seems great at first glance, but in reality does little to address the underlying wage issues faced by servers. “It just feels like they’re giving out little pieces of candy and not doing anything systemic to actually improve things for the majority of workers,” he says.
The idea of not taxing tips received political support from both sides of the aisle, but servers worry that its wide popularity may affect the amount of tips they receive. “Do you think that people might feel less inclined to tip me knowing that I will not be getting taxed on it?” wondered Kevin Costello, a bartender in Philadelphia.
At Arianna Luttrell’s restaurant in Hudson, Ohio, it’s an issue that’s already arisen with customers. “We’ve had one or two customers bring it up,” she says. “They made jokes like, ‘now that your tips aren’t taxed, I don’t need to pay you as much.’” It’s the kind of bad joke she’s forced to smile through in order to make sure she gets a decent tip. “It is a weird place to be,” she says, “where the person making the bad joke is also paying you to listen to it.”