Millions of low- and middle-income service workers will soon keep more of their hard-earned income thanks to a key provision in the newly passed Republican tax package, officially titled the Big Beautiful Bill, signed into law last week by President Donald J. Trump.
A centerpiece of the legislation is the elimination of federal income taxes on tips, a move aimed squarely at working-class Americans in industries like food service, hospitality, and personal care. The measure, which takes effect for tax year 2025, allows workers to exclude gratuities from federal taxable income—a change that economists say will benefit a large, often-overlooked segment of the workforce.
According to the Joint Committee on Taxation and recent Congressional Budget Office (CBO) estimates, more than 5.5 million Americans report income from tips each year. Of those, approximately 74% report earning less than $25,000 annually in tip income. For these workers, often balancing multiple part-time jobs or relying on variable hours, the tax exemption could translate to hundreds—or even thousands—of dollars in retained income annually.
In a departure from earlier tax proposals, the tip exemption is structured as an above-the-line deduction, meaning it reduces taxable income before calculating eligibility for the standard deduction. That distinction is key: workers can now exclude tips from income while still claiming the full standard deduction under the new tax brackets.
The Big Beautiful Bill raised the standard deduction significantly for 2025—$15,750 for individuals and $31,500 for married couples filing jointly, up from $14,600 and $29,200 respectively. That change, combined with the tax-free tip rule, means many low-income workers will owe no federal income tax at all.
Public support for the idea is strong. A recent YouGov poll found that more than 70% of Americans support eliminating taxes on tip income, including majorities across party lines. For workers, the appeal is intuitive: if you earn a dollar in tips, you should be able to keep it.
The measure is being marketed as a cost-effective, targeted relief mechanism. Early CBO scoring suggests the tip exemption would cost the federal government approximately $13.7 billion over ten years. Republican lawmakers argue the cost is well worth the benefit, citing fairness and the burdens faced by low-income workers in volatile industries.
Supporters of the measure argue that it’s a rare tax change that is both easy to understand and widely popular. Rep. Kevin Hern (R., Okla.), who helped shepherd the bill through the House, has consistently emphasized provisions like the tip exemption as central to the bill’s working-class appeal. In public statements, Hern highlighted eliminating taxes on tips and overtime as part of a broader plan to make the tax code fairer and more accessible for everyday Americans.
“This policy change puts money directly back into the hands of people who actually earn it,” Hern has said in various press appearances, pointing to the simplicity and focus of the measure as a contrast to more corporate-heavy tax code adjustments of the past.
Democrats have raised concerns about compliance and abuse, pointing to the potential for underreporting or fraudulent claims. However, the legislation includes IRS guidance requiring that tips be reported electronically through employers, as is standard under existing payroll systems. Employers would still be required to withhold Social Security and Medicare taxes on tipped wages.
In industries like food service—where the Bureau of Labor Statistics reports median wages of $14.20 an hour, including tips—the change has been broadly welcomed. “This is a win,” said Maria Velasquez, a server in San Antonio who works double shifts at two restaurants. “It’s not going to make me rich, but it’ll help me pay off my credit card a little faster.”
According to estimates from the Urban-Brookings Tax Policy Center, about 4.2 million workers would see a direct benefit in the first year alone, with an average federal tax savings of $870 per recipient. Workers in high-cost urban markets like New York and Los Angeles, where tipping is more customary and earnings can be higher, may save even more.
With the president signing the bill into law on July 4, the tip exemption will apply to all eligible taxpayers starting January 1, 2025.
Even some Democratic lawmakers—while critical of other portions of the bill, such as expanded capital gains treatment—acknowledged the popularity and fairness of the tip exclusion.
“No Tax on Tips was one of President Trump’s key promises to the American people … I am not afraid to embrace a good idea, wherever it comes from,” said Senator Jacky Rosen (D–Nev.)
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