The 2025 Trump tax bill created a new tax deduction that will allow some people who receive tip income through work in a specified list of occupations to deduct up to $25,000 in qualified tips from their taxable income for tax years 2025 through 2028. (The $25,000 max deduction is per tax return, so married filers cannot double their deduction.) Deductions begin to phase out at $150,000 in adjusted gross income for single filers or $300,000 for married filers. Workers will also still owe federal payroll taxes on all their tips and may owe state income taxes on tips.

Employers of tipped workers are the biggest beneficiaries of the tax deduction on tip income because the policy will allow these employers to restrain and possibly cut some workers’ already-low wages to reduce labor costs. See the question on employer behavior for more.

Among individual taxpayers, anyone who earns tips in an eligible tipped occupation and reports those tips on their federal tax return is eligible for the tax benefit, but only if they owe federal income tax. Only about 3 million workers (1.7% of U.S. workers) work in traditionally tipped occupations and thus could be eligible for the benefit; however, a sizable share of tipped workers earn too little to have any federal income tax liability and would therefore not receive any tax benefit. Because the size of the deduction is directly proportional to tip income earned and to a worker’s overall income level, eligible workers with the lowest incomes will benefit the least.

Among those who benefit from the tax deduction, the average overall benefit will be about $1,400 in 2026, with higher earners receiving larger benefits and lower-income tax filers smaller ones. Among all taxpayers in the top 60% of the income distribution—regardless of whether they receive the tax deduction—the average benefit is between $40 and $45 per tax return in 2026. Most of the direct tax benefits of the policy will go to middle- and higher-income taxpayers, while the bottom 40% will see virtually no benefit (between $0 and $10 in tax savings on average in 2026). That’s because more than a third (37%) of tipped workers earn too little to owe federal income tax.

Workers who do not receive tips—the overwhelming majority of workers—do not benefit. Additionally, taxpayers who are married filing separately and taxpayers who do not have a Social Security number cannot claim the deduction.

Tipped workers already face serious workplace challenges exacerbated by the way that they are compensated. These include low wages, greater income instability, as well as higher incidences of wage theft, discrimination, and potential abuse—from employers and customers alike. “No tax on tips” addresses none of these problems. Instead, it creates conditions that could make tipped jobs even worse and put downward pressure on tipped workers’ overall earnings, for several reasons:

1. Although most tipped workers already receive only trivial base pay from their employers, “no tax on tips” may derail or delay efforts to raise tipped minimum wages and could result in more workers either seeking or being shifted into tipped positions. (See the section on employer behavior for more detail.)
2. Because employers can reduce their labor costs by relying more heavily on tipped workers, tipped staff may end up being tasked with additional work previously done by nontipped employees.
3. Public awareness of “no tax on tips” could result in customers tipping less, as they perceive tipped workers as receiving unfair preferential tax treatment.

The U.S. tipping system originated in the aftermath of the Civil War and the abolition of slavery. Black workers were relegated to service-sector jobs and to avoid paying them a wage, employers suggested customers pay them a small tip for their services. Over time, the use of tipping to pay a worker’s primary wage—instead of as a bonus on top of employer-paid wages—became an increasingly common practice for service-sector employment. Maintaining this separate, unequal system for service-sector wages has been a top lobbying priority of the restaurant industry ever since.

A tax deduction for tips will encourage employers to rely more on tipped work and enable them to avoid raising workers’ base wages. Under federal law, employers can pay tipped workers as little as $2.13 an hour so long as those workers receive, over the course of a workweek, enough customer-provided tips to bring workers’ average hourly earnings up to the federal $7.25 minimum wage. Many states have set tipped minimum wages higher than the federal $2.13, but most retain a lower minimum wage for workers who receive tips—meaning that, by law, employers in most of the country pay their tipped staff less than their nontipped staff. Because of the preferential tax treatment of tips, some workers who may have otherwise been reluctant to accept this subminimum base wage may now be willing to do so, and employers may try to convert as many of their staff into tipped positions as they can to lower their labor costs.

More broadly, a tax deduction for tips reduces pressure on employers to raise base wages and could hamper advocacy efforts at the state and federal level to raise the minimum wage. Employers could use the preferential tax treatment of tipped earnings (and the expectation that workers’ take-home pay is increasing, even if it is not) as a justification to deny wage increases to their employees, allowing employers to effectively capture a portion of the tax benefit.

“No tax on tips” will encourage employers to shift more of their labor costs to customer-provided tips and decrease pressure to raise base wages. This depresses wages for other workers in the local economy, as employers competing to attract and retain staff now have less incentive to raise pay.

In addition, the income tax deduction for tips is supposed to apply only to a specified list of occupations that customarily and regularly receive tips. However, the Department of the Treasury has taken a broad interpretation of tipped occupations, issuing proposed regulations that list nearly 70 occupations that would be eligible for the tax deduction on tips, including home maintenance and repair workers, plumbers, electricians, and HVAC technicians. These are traditionally middle-class jobs that could now be exposed to problems of tipped employment, including the possibility that employers will reduce (or stop raising) workers’ hourly base wage, expecting them to make up the difference in tips.

This incentive to shift more labor to tip-receiving jobs means consumers could be asked to tip more frequently. In recent years, tipping culture has already proliferated, with customers being prompted to give larger tips or tip in contexts in which a tip was traditionally not expected. The tax deduction on tips will likely exacerbate this trend as employers seek to reduce their labor costs by shifting more work to tipped employees and workers seek to lower their tax burden by increasing their tip income.

“No tax on tips” also shrinks state and federal revenues, leading to fewer funds available to pay for public goods and services that benefit everyone.

Giving tipped income preferential treatment in the tax code makes our tax system less fair. Workers with similar pre-tax income should be treated similarly in the tax code, regardless of how that income is earned (i.e., whether it comes from regular wages vs. tips). This is often referred to as “horizontal equity.” A retail cashier who works long hours for low pay should not face a higher tax bill than a restaurant server with the same income and hours simply because the cashier’s income comes from a paycheck rather than a tip. Efforts to raise pay for low-wage workers should focus on the level of earnings, not whether payment came as a gratuity.

The Trump tax bill’s tip income tax deduction will reduce federal government revenue by $10 billion in 2026, and nearly $32 billion over the next 10 years.

Whether the policy affects state revenues and whether workers can claim the deduction on state taxes depends on whether states “conform” to the federal tax code when defining taxable income and, in some cases, whether states choose to adopt analogous provisions in their state tax code. In Michigan, which adopted the recent federal tax changes into state law, the income tax deduction for tips, overtime, and Social Security will cost the state $158 million in its first year of implementation. Arizona and Colorado have indicated that they will conform with the policy and are therefore expected to lose an estimated $24 million and $90 million in annual revenue, respectively. The Institute on Taxation and Economic Policy estimates that if all states with income taxes decided to adopt the tip deduction, it would lead to a loss of $2.74 billion in state revenue in 2026 alone.

Income tax deductions only benefit workers who earn qualified income and because the federal income tax system is progressive (people with larger incomes are taxed at higher rates), the benefits of income tax deductions are skewed toward higher earners. Households earning the most income receive the biggest benefits and the lowest earning households do not benefit at all. As a result, tax deductions are generally not well-targeted methods for raising the incomes of low- and middle-income workers, narrowing racial and gender income gaps, or addressing poverty and inequality.

Income tax deductions are also often temporary—the deduction for tips expires after 2028—so they do not provide durable benefits to workers. Moreover, some income tax deductions, including the deduction for tipped income, exclude people based on their tax filing status. For example, taxpayers who are married filing separately and taxpayers who do not have a Social Security number cannot claim the deduction.

The federal bill to raise the minimum wage and phase out the tipped minimum wage would benefit nearly 23 million workers—2.8 million of which are tipped workers—with affected workers receiving $3,200 more in wages every year thereafter. Over a 10-year period, raising the federal minimum wage would provide 18 times more income to workers than the no-tax-on-tips deduction. A minimum wage increase also benefits the lowest-paid workers the most, while “no tax on tips” excludes the lowest-income workers entirely.

Beyond raising the minimum wage, there are several other effective and more equitable policies to support working families—including expanding the Earned Income Tax Credit and Child Tax Credit, providing workers with paid sick leave and paid family and medical leave, and supporting workers’ rights to form and join unions.

The harm caused by the Trump tax bill will greatly exceed any benefits for most working people. The bill included a set of small, temporary tax deductions for some workers who earn tips and overtime and created new, poorly-targeted child savings accounts—while the rest of the legislation hands huge tax giveaways to the rich at the expense of the working class. The Trump tax bill will give a $1 trillion tax cut to the richest 1% over the next decade; it pays for these cuts by slashing an equivalent amount of funding for Medicaid and SNAP (food stamps). The bill also massively expanded funding for the Department of Homeland Security and Immigration and Customs Enforcement, providing them the resources to implement the administration’s mass deportation agenda—an agenda that will destroy jobs for both immigrant and native-born workers. In contrast, the bill added no new funding to federal agencies that enforce workers’ rights.