Understanding the Impact of ‘No Tax on Tips’ Legislation on Service Workers and Customers

The slogan “no tax on tips” gained traction during last year’s presidential campaign due to its simplicity and appeal.

However, the tax implications surrounding this proposal are considerably more intricate.

Recently, the Senate unanimously approved the No Tax on Tips Act, fulfilling promises made by political leaders to provide tax relief for tipped employees. Currently, this tax break is being integrated into the “One, Big, Beautiful” budget package under negotiation by House Republicans, with an anticipated effective period from 2026 to 2028.

What impact would these changes have on workers in the food service industry and their customers? Insights gathered from tax experts, hospitality academics, and industry representatives reveal the following:

Current Tax Treatment of Tips for Restaurant Workers

Under existing federal tax law, all tips must be declared as income. Whether tips are given as cash, added to a credit card payment, or processed through electronic systems, both employees and employers are obligated to record and report every tip received. This holds true whether tips are retained individually by servers or pooled and shared among staff.

Defining What Constitutes a Tip

Within the tax code and proposed legislation, a “cash tip” includes gratuities given in physical currency, through credit or debit card transactions, or via a business’s digital payment platform. It remains unclear if tips sent directly to workers through peer-to-peer payment apps like Venmo or PayPal would qualify as cash tips. Additionally, service charges added by businesses—which are permitted in some jurisdictions—are excluded from the definition of tips.

Details of the Proposed Tax Change

The current House legislation proposes that tip income be exempt from federal income taxation. This would be implemented as an “above the line” deduction on tax returns, effectively lowering the taxpayer’s adjusted gross income, which is the basis for calculating income tax liability. Despite the exemption, all tips would still need to be documented and reported.

Who Stands to Benefit?

Discussion continues over which workers would gain from this measure, which covers all tipped employees in the restaurant sector. This group includes servers, baristas, food delivery personnel, and anyone who receives payment via point-of-sale devices after completing a transaction. Government statistics show that over two million workers in the United States fall under this category.