How ‘No Tax on Tips’ Could Affect You as Both a Server and a Customer
Written by
Josephine Nesbit
Edited by
Jenna Klaverweiden
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The Trump administration’s “No Tax on Tips” proposal would do more than make all tips income tax-exempt for servers. While this tax proposal promises to benefit servers, it’s more complex than that.
Here’s a breakdown of the proposal and how it could impact servers and customers.
Also see four types of people who will get money back from President Donald Trump’s new tax initiatives.
What Is the No Tax on Tips Act?
The No Tax on Tips Act, a standalone bill endorsed by both President Donald Trump and former Vice President Kamala Harris, would give tipped workers a tax break on gratuities of up to $25,000 from federal income tax. Currently, it is being incorporated into the “One, Big, Beautiful Bill” being negotiated by Congress.
Under the original proposal, only cash tips that are reported to the employer for payroll tax purposes would qualify for the deduction. Workers earning more than $160,000 per year would not be eligible, and the deduction would not apply to payroll taxes or state income taxes unless states follow suit.
The bill also includes an expansion of the business tax credit for employers. This would allow them to claim a credit on payroll taxes for tips received in beauty services establishments, such as hairstyling, nail care and spa services, not just food and beverage service.
How It Could Affect Servers
Under current law, every tip — cash, credit, debit or via the business’s electronic payment system — must be reported as income no matter the amount. According to The New York Times, tipped workers would see more money in their wallets, but there’s debate over who would benefit the most from the measure.
Supporters have called the proposal a “lifeline” that would provide some financial relief for servers who depend on gratuities to make ends meet, according to the Economic Policy Institute. However, critics argue that it could backfire, and it would help very few workers.
Citing data from the Brookings Institution, the Economic Policy Institute pointed out that 37% of tipped workers don’t earn enough to pay federal income tax, and could even lose income, as they could lose eligibility to important tax credits, like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
The policy could also give employers cover to avoid raising base wages, especially in industries still using the federal tipped minimum wage of $2.13 an hour, unchanged since 1993, the Economic Policy Institute reported. While many states have increased their minimums, some still allow wages far below the standard.
How It Could Affect Customers
At a quick glance, the No Tax on Tips Act may seem to affect only workers and employers, but customers could experience changes in tipping culture. One potential outcome is the continued expansion and backlash around tipping norms.
The Education Policy Institute estimated that this tip-prompting from employers could accelerate. More service industries could adopt this approach and may expect a voluntary tip at the end of the transaction.
Rising prices and growing prompts for tips in quick-service businesses like coffee shops and fast-food chains have led to “tip fatigue.” According to The Wall Street Journal, 38% of consumers reported tipping restaurant servers 20% or more in 2024, citing data from restaurant technology company Popmenu. That’s down from 56% in 2021. Americans also went to restaurants less in 2024 than in 2023.
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