Timeline:
September 22, 2025 – IRS issues proposed regulation listing occupations that qualify for “No Tax on Tips” provision. The proposed rule was open to comments from the public until October 22.
July 4, 2025 – The massive federal budget bill is signed into law with the “No Tax on Tips” provision.
As part of the large budget reconciliation bill signed into law by President Trump in summer 2025, Congress directed the Department of Treasury and the Internal Revenue Service (IRS) to implement a program that allows workers and self-employed individuals to deduct up to $25,000 of qualified tips they receive in a year. The deduction is phased out for individuals whose gross income exceeds $150,000 and is only effective for tax years 2025-2028. The OBBBA also included provisions for workers to deduct up to $15,000 in qualified overtime for tax years 2025-2028.
In September 2025, the IRS issued a proposed rulemaking that identified the list of occupations in which workers would be eligible for the “No Tax on Tips” break. The proposed rule specified the occupations listed were those that “customarily and regularly received tips on or before December 31, 2024.” In total, the proposed rule includes nearly 70 occupations, many of which have not traditionally been classified as tipped occupations for purposes of the Fair Labor Standards Act.
Impact: The Trump administration boasts the “No Tax on Tips and Overtime” provision would save workers nearly $1,500 annually. However, many tipped workers earn so little that they do not pay federal taxes and would not benefit from this deduction. Further, by incentivizing the expansion of tipped work, the “No Tax on Tips” provision encourages employers to subject their employees to a system that is associated with low pay, discriminatory practices, and wage theft.
Not taxing tips will reduce pressure on employers to raise base wages. Employers would use the preferential tax treatment of tipped earnings as a justification to deny wage increases to their employees, allowing the bosses to effectively capture a portion of the tax benefit for themselves.
Further, because of the perceived tax benefit, employers may reduce workers’ base pay and just encourage customer tipping because tips will supposedly make up the difference, replacing a portion of their base wage. Again, this is the employer capturing a portion of the tax benefit for themselves. There’s already at least one example of this happening shortly after the reconciliation bill’s passage: when a rest stop in Pennsylvania changed employees’ pay from $14 an hour to $11 an hour plus tips.
Finally, by including occupations that have not traditionally been classified as tipped work, the proposal exposes workers to misclassification, which is costly to workers and social insurance programs. Many of the listed occupations in this NPRM have higher median wages and report less frequent tips – jobs like home services professionals and plumbers. This could essentially risk making these relatively more stable, higher-paying jobs worse by exposing them to the volatility of tips and cuts in base wages. This will be especially true if customers don’t actually change their behavior, and don’t increase the frequency or dollar amount of tips for their plumbers or electricians. It would also open up those workers – who might be currently enjoying stable and better-paid employment than many commonly tipped occupations – to the kinds of discrimination, harassment, and other risky conditions that workers in occupations who rely on tips have always experienced.