President Trump’s promise to eliminate federal income tax on worker tips will become a reality Friday when he signs the massive budget package into law.
After narrowly squeaking through the House on Thursday, the “big, beautiful bill” now heads to the president’s desk for his signature. As part of the legislation, workers who rely on tips for a large share of their income, such as waiters, bartenders and hairdressers, will see relief from federal income tax on those tips.
The White House has framed the tax cuts as a win for the working class. But critics such as the Independent Restaurant Coalition have pushed back on that notion, saying the benefits for tipped workers would be temporary and that this apparent tax cut wouldn’t help most low-wage workers.
How does “no tax on tips” work?
The “no tax on tips” provision in the spending bill creates a new deduction for tipped workers, eliminating what they owe in federal income tax. Tipped workers still have to pay state and local income tax and payroll taxes.
The House and Senate versions of the tax and spending bill vary on a few key points, including how much a worker could claim in deductions. The Senate proposal limits that deduction to $25,000, while the House version is uncapped.
Under the House measure, meanwhile, only people with annual income of $160,000 or less would qualify for the tipping tax break, while the Senate version would phase out benefits for individuals whose income exceeds $150,000 or couples whose income exceeds $300,000.
Notably, however, under the budget bill those tip tax cuts would extend only through 2028, and so Congress could restrict or even abolish the tax break in future.
Who benefits?
A May report from the White House’s Council of Economic Advisers estimates that eliminating taxes on tips for eligible workers would increase their average take-home pay by $1,675 per year.
According to the White House, a June survey found that 83% of hourly workers support eliminating taxes on tips. “These results suggest that any measure increasing the amount of immediately available income — such as untaxed tips — would provide meaningful, stabilizing support for a large segment of the hourly workforce,” according to that report.
Data from the Yale Budget Lab shows that roughly 4 million people — 2.5% of the American workforce — worked in tipped jobs as of 2023. But given the way the budget bill is written, not all will necessarily benefit. The nonpartisan policy research center notes in a recent analysis that over a third of tipped workers in the U.S. are already exempt from federal income tax because their earnings are too low.
“A deduction for tipped work is actually a pretty horrible way to help low-wage workers,” Ernie Tedeschi, the director of economics at the Yale Budget Lab, told CBS MoneyWatch. “You’re only helping a narrow slice of them, and it’s not helping the lowest of low-wage workers because they don’t have any federal tax liability to begin with.”
Only about 4% of workers who earn less than $25 per hour also get tips, the group has found. As a result, low-wage servers at many restaurants could qualify for the tax break, but fast-food employees might not despite earning similar incomes.
“It’s going to help some very, very high earners, along with some middle earners,” Sylvia Allegretto, senior economist at the Center for Economic and Policy Research, told CBS MoneyWatch. “The lion’s share of low-wage workers, it’s not going to touch because they’re not tipped workers.”
A better way to helps low-wage workers, labor advocates say, would be to raise the federal minimum wage, which has been stuck at $7.25 an hour since 2009.
“It’s not that these workers pay too much in taxes or that taxes are a problem,” Allegretto said. “The problem is they just don’t earn enough money.”
Mary Cunningham is a reporter for CBS MoneyWatch. Before joining the business and finance vertical, she worked at “60 Minutes,” CBSNews.com and CBS News 24/7 as part of the CBS News Associate Program.
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