What 'no tax on tips' really means for service workers—and everyone else

The broad tax package passed by House Republicans last week includes a bill that would eliminate federal income taxes on tips, advancing a key campaign promise from President Trump with unexpected bipartisan support. 

If enacted, the change would take effect from 2026 through 2028. The idea is straightforward: Let tipped workers keep more of their earnings. But how would the bill actually work—and what could it mean for the broader tax system, tip culture and even Social Security?

Nicole Lazzeri

CU Boulder’s Nicole Lazzeri, a teaching assistant professor of accounting at the Leeds School of Business, sat down with CU Boulder Today to walk through the policy proposal, what it actually covers and what workers and taxpayers should know.

At a high level, what is this “no tax on tips” idea trying to accomplish? Who benefits the most?

The biggest direct beneficiaries would be people who rely on tips for a significant portion of their income—restaurant servers, rideshare drivers, barbers, nail techs, bellhops. That part is pretty clear.

But when you look under the hood, it gets a little more complicated. The current version of this proposal—the one included in what’s been dubbed the “Big, Beautiful Bill”—doesn’t actually remove all taxes on tips. It lets workers deduct their reported tip income from their federal income taxes, but tips would still be subject to payroll taxes—that’s Social Security and Medicare, the 7.65% that’s taken out of every paycheck.

So yes, it would help some workers. But not as much as it might seem.

So this isn't the same as treating tips like gifts, which aren’t taxed at all?

Exactly. There were earlier versions of this idea that would have classified tips as gifts, which means they wouldn’t be taxed at all. But that’s not how this latest version is written.

Instead, you’d still report your tips on your W-2, and they’d still count for payroll tax purposes. The change is that you’d get what’s called an “above-the-line” deduction on your income taxes. That’s good, because it means you don’t have to itemize to take the deduction. But if you make over $160,000, you wouldn’t be eligible at all.

What’s the real-world impact for workers—especially low-income workers who may not owe much in federal taxes anyway?

This is a big one. Many workers who earn most of their income in tips—especially college students or part-time workers—often don’t owe federal income tax in the first place. In fact, a 2022 stat I found said 37% of tipped workers had too little income to owe federal income tax.

But that doesn’t mean they don’t owe any tax. Most still have to pay that 15.3% self-employment tax—or at least half of that if they’re regular employees. And that kicks in at just $400 of earnings, way below the standard deduction for income taxes. So the policy may help some people, but not necessarily the lowest earners, which is important to understand.

Would this change have any impact on Social Security or Medicare funding?

As it’s written now, no—not directly. Because tips would still be subject to payroll taxes, they’d still count toward Social Security and Medicare. If the proposal had treated tips like gifts, that would have been a bigger issue, since those programs are funded through payroll taxes.

Of course, it’s always possible that regulations change after the fact, but as of now, those contributions would still be made.

Are there any precedents in the tax code for something like this?

Not really—at least not for earned income. We have exclusions for things like scholarships, life insurance proceeds, gifts, inheritances. But those aren’t considered earned income.

This would be one of the first cases I know of where someone works for the money and then isn’t taxed on it—at least for income tax purposes. That’s pretty unusual.

What about other concerns or unintended consequences? Could this change tip culture itself?

There’s some speculation that it could go either way. On one hand, if customers know that tips won’t be taxed, they might tip less, assuming workers are keeping more of it. Tip fatigue is a real thing—people are already frustrated by how often they’re asked to tip, especially for counter service.

On the other hand, maybe workers would be more motivated knowing they’ll keep more of each dollar. So it’s hard to say how that will net out.

Another thing to remember: States don’t have to follow federal tax policy. Some may still tax those tips at the state level. During the COVID pandemic, for example, federal unemployment benefits were made tax-free retroactively—but some states kept taxing them. That could happen here, too.

Why do you think this polls so well, even though the details are so wonky?

I think it just sounds good. It’s an easy message—“Let workers keep their tips”—that appeals to a broad audience.

It could also be a way to energize younger voters or blue-collar workers in swing states. I’ve seen similar momentum with policies like legalizing marijuana or forgiving student loans—things that play well in campaign ads even if the actual implementation is complex or limited.

Could this open the door for other industries to ask for similar exemptions?

That’s a possibility. Once you carve out one type of income from taxation, it becomes harder to argue why others shouldn’t get the same treatment.

From a tax policy perspective, it’s cleaner to pass laws that apply across industries, rather than adding more exceptions to an already complicated code.

Is there anything else that people should know about this?

One small but interesting detail is that employers could also benefit. Restaurants and similar businesses could claim a credit for the payroll taxes they pay on cash tips—but only if those tips come from serving food or drinks. The “No Tax on Tips” bill proposes to extend this credit to employers in the beauty service industry. 

Also, the current proposal would expire at the end of 2028. So unless Congress extends it, this could be temporary.

Bottom line?

This policy could offer some real savings for service workers—but the name doesn’t tell the full story. Tips would still be taxed in some ways, and not everyone stands to benefit equally.