Bartender Athena Young cleans glasses while speaking to the Review-Journal about the “no tax on tips” policy at Atomic Kitchen in Las Vegas, Wednesday, July 31, 2024.
Las Vegas Review-journal | Tribune News Service | Getty Images
Maddy Lopez, a bartender in Los Angeles, has spent 25 years working in the restaurant industry, where tips can make up a significant portion of a worker’s income.
When she heard about President Donald Trump’s “big beautiful bill,” which includes a section called “no tax on tips,” she said her first reaction was: “It’s a little too good to be true.”
Lopez said that in her experience, tax breaks often seem to include “a catch,” and she isn’t sure the benefit will be as generous as some workers expect.
It’s a reasonable question, experts say: Some key details of the provision — including which occupations and kinds of gratuities may qualify — are still unclear. There’s also some confusion among workers about how the tax break works.
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T. Cooper, a hair and makeup stylist in New York City, said that the measure is “being perceived incorrectly” among tipped workers she knows.
“A lot of people don’t understand that you will still have to pay the tax on tips,” she said.
How ‘no tax on tips’ works
Both Republicans and Democrats floated the “no tax on tips” idea during the 2024 presidential campaign.
The “no tax on tips” provision in Trump’s “big beautiful bill” provides a deduction worth up to $25,000. This tax break, which is available even if you don’t itemize deductions, reduces taxable income.
The deduction phases out, or gets smaller, once modified adjusted gross income exceeds $150,000. The law is also temporary; the tax break is available from 2025 through 2028.
However, “you’re still likely paying state taxes” on tip income, and you’ll owe payroll levies for Medicare and Social Security, said Ben Henry-Moreland, a certified financial planner with advisor platform Kitces.com, who analyzed the legislation.
A lot of people don’t understand that you will still have to pay the tax on tips.
T. Cooper
a hair and makeup stylist in New York City
Deductible tips must appear on information returns from your employer, such as Form W-2 or 1099. But the agency’s reporting rules for tip income remain unclear, experts say. For example, questions remain about how employers need to report tips on Forms W-2 or 1099 to qualify for the deduction.
Currently, workers who make $20 or more per month in tips must report those earnings to employers, according to the IRS. Tips can include cash directly paid by customers, payouts from tip-sharing structures among employees and credit card payments.
The IRS is expected to clarify which occupations qualify for the tax break in early October, per the agency.
What counts as ‘qualified tips’
According to the provision, “qualified tips” include cash or gratuity paid by credit card, as well as earnings from a sharing arrangement.
But it also says tips must be paid voluntarily by the customer. That puts automatic service charges — like mandatory gratuity charges restaurants impose on larger parties — in question, experts say.
Adding to the reporting confusion, it’s not unusual for those kinds of mandatory gratuities to mix with other tip income and simply appear as tips on tax forms, Lopez, the bartender, said of her experience.
Customers are tipping less
In some industries, tipping has decreased as consumer sentiment declines. During the second quarter of 2025, the average tip across restaurants, cafes and bars was at 14.99%, down from 15.17% the prior quarter, according to a new report by Square, a technology services company.
“As consumer confidence in the economy shifts and tips fall, workers are taking home less,” Ming-Tai Huh, head of food and beverage at Square, wrote in the report.
Some consumers are also experiencing “tipping fatigue.” About 41% of Americans said that “tipping is out of control” in 2025, up from 25% last year, according to a Bankrate report.
Miodrag Ignjatovic | E+ | Getty Images
Some workers say higher service costs and reduced consumer spending have contributed to these tipping trends.
In the hair industry, prices typically rise every year as the cost of materials, rent and services go up, said Cooper.
“So it’s not that people have an issue with tipping,” she said. “The service overall has just become way more expensive.”
In restaurants and bars, it’s not unusual to see smaller checks these days, Lopez said, which makes your tip average decline.
For example, previously, a $200 tab could earn $40 in tips. But nowadays, a typical tab could be $100, she said, and “you’re only making $20 on the same guest.”
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