Congress has recently enacted a significant change affecting tipped workers with the passing of the One Big Beautiful Bill Act, which is part of President Trump’s broader legislative agenda. This new law provides a temporary tax exemption on tips, allowing workers to deduct up to $25,000 in tips from their taxable income annually. Beyond this limit, tipped income will be subject to federal taxes. According to Garrett Watson from the Tax Foundation, this measure aims to benefit the majority of individuals earning tips in the U.S., while also preventing high earners from misclassifying their income.
However, workers earning more than $150,000 annually will see their tipped income start to be taxed again, addressing concerns about wealthy individuals misusing the system. The legislation stipulates that tax-free tips are limited to jobs traditionally associated with tipping, although specific job classifications have not been outlined.
The introduction of this law aligns with Trump’s campaign promises, aiming to reduce the tax burden on tipped workers and stimulate the economy. Notably, both parties in Congress showed some support for the inclusion of this provision, with notable bipartisan endorsements from figures like Senators Ted Cruz and Jacky Rosen, and Representatives Vern Buchanan and Steven Horsford. Yet, the legislation has faced criticism primarily from Democrats who argue that cuts to Medicaid could impact millions of Americans.
Experts like Martha Gimbel express skepticism regarding the overall impact of the tax changes, pointing out that tipped positions only represent about 2.5% of the labor market. They emphasize that the law’s benefits may primarily favor middle-class tipped workers, with low-income earners likely receiving little to no advantage due to their minimal taxable income.
As the law prepares to take effect, tipped workers are encouraged to stay informed and may want to adjust their W-4 withholdings in anticipation of these changes. The IRS and Treasury Department are expected to provide further guidance to ensure correct implementation of the new tax rules. It remains to be seen how these adjustments will play out in the coming tax season.