'No Tax on Tips’ One Year Later: A Win for Workers?

Tax Notes legal reporter Trevor Sikes investigated how the qualified tips deduction under the One Big Beautiful Bill Act has affected tipped workers in the year since the law's enactment.

Sikes and fellow legal reporter A.J. Collins interviewed the following people for this episode: 

• Morgan Harms, a server at William Jeffrey’s Tavern in Arlington, Virginia 
• Michael Chittenden, a lawyer with Covington and Burling 
• Matt Catchpole, owner of the South Carolina restaurant group Panhandle Slam Hospitality 
• Jim Toole, a clubhouse manager for the Lancaster Stormers, an American professional baseball team in Pennsylvania 

For more, read Sikes and Collins' story in Tax Notes, "Check, Please: Workers React to ‘No Tax on Tips’ One Year In."

Our audio sources for this episode:

• Vice President Vance Delivers Remarks in Michigan on Tax and Spending Cuts Legislation
• Secretary Scott Bessent Testifies on Treasury Department 2027 Budget Request
• Former President Trump Holds Rally in Las Vegas

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Credits
Host: David D. Stewart
Executive Producers: Jeanne Rauch-Zender, Paige Jones
Producer: Jordan Parrish
Audio Editor: Laura Kondourajian

Transcript

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: keep the change.

In July of 2025 the One Big Beautiful Bill Act was signed into law. Several of the items included in the bill were widely championed by President Trump for working Americans, such as the provision he calls "no tax on tips."

So, now, a year and a filing season later, what are the results?

Tax Notes legal reporter Trevor Sikes recently did a deep dive into how the "no tax on tips" provision affected the workers it was designed to help.

Trevor, welcome back to the podcast.

Trevor Sikes: Hi, Dave. Glad to be back.

David D. Stewart: First of all, could you tell us about the inspiration for going into this story?

Trevor Sikes: Sure. Well, this really began when I was speaking with various servers, baristas, bartenders, wherever I could ask people questions about how these workers received their tips. I wanted to know if the "no tax on tips" provision in the One Big Beautiful Bill was really changing the way businesses and tipped workers were handling their tips.

To my surprise, I often heard from tipped workers that they knew very little about this new provision, some not even knowing of it at all. Others I spoke with were very skeptical about its actual benefits.

Now, given that we're done with tax season and we're one year into this new provision, along with the One Big Beautiful Bill itself, I wanted to explore more about the "no tax on tips" from the tipped workers' perspective.

David D. Stewart: And can you remind listeners what exactly the "no tax on tips" provision is about?

Trevor Sikes: Sure. It's a provision that allows a taxpayer to deduct up to $25,000 in eligible tips. Now, in order for a tip to be eligible for the deduction, it must be voluntarily given, meaning that automatic gratuities and service fees don't count. And it has to satisfy a few other requirements laid out both in the statute and the guidance that Treasury and the IRS have released.

David D. Stewart: Today's episode is a bit different than our usual ones. Could you tell our listeners what they're about to hear?

Trevor Sikes: Well, with the help of my amazing colleague, A.J. Collins, they'll get to hear thoughts about the "no tax on tips" provision from those who are closest to the provision itself: the workers.

They'll also hear insights from the tax professional perspective regarding what benefits this provision has to offer, but also what might be causing some of the headaches that workers are facing when it comes to actually claiming this deduction.

David D. Stewart: All right, let's go to those interviews.

Trevor Sikes: The qualified tips deduction, often called the "no tax on tips," has been touted by the Trump administration as a win for middle-income Americans. Vice President Vance recently said:

Vice President Vance: We talk a lot about the working families' tax cuts. We talk about no taxes on overtime, which we are proud to deliver; no taxes on tips, which we are proud to deliver; the lowest taxes that we've had in this country in a very long time.

Trevor Sikes: And Treasury Secretary Scott Bessent also highlighted to Congress:

Scott Bessent: There's no better example of delivering meaningful change for everyday Americans than President Trump's working families' tax cuts, of which over 60 million returns — 60 million — claimed at least one of President Trump's signature new tax cuts this filing season. By enacting no tax on tips, no tax on overtime, and new tax cuts for seniors on Social Security, we are delivering tax relief to working families. This season, over seven million filers have claimed no tax on tips, with an average deduction of over $7,000.

Trevor Sikes: But following conversations I had with service workers and others who receive tips, questions started to arise, such as, "Does this deduction do what the administration is claiming? Do workers really feel like the provision is worth it? And does the deduction provide them with the relief that they were expecting?"

Morgan Harms is a server at William Jeffrey's Tavern in Arlington, Virginia.

Morgan Harms: I started at Rhodeside [Grill]. I went from Rhodeside, then transferred to William Jeffrey's. But altogether I've been with the company for four years. So I've been serving a good four years now.

Trevor Sikes: And like so many in the service industry, tips are an important part of her job.

Morgan Harms: I specifically rely on my tips. I get paid $2.13 an hour from the restaurant. That's what I rely on, are my tips.

Trevor Sikes: So, when it came to hearing about "no tax on tips," Morgan was excited.

Morgan Harms: Going into it, I mean, it sounds like a dream, right? We're going to get all our taxes back, and it's just like, "Oh, wow, that's going to be amazing."

Trevor Sikes: But when it came time to file her taxes, the outcome wasn't what she had hoped for.

So, where did the qualified tips deduction come from, and what does it do? Well, it all started with President Trump's campaign pledge to eliminate taxes on tips after a claimed conversation with a server in Las Vegas.

President Trump: So, this is the first time I've said this, and for those hotel workers and people that get tips, you're going to be very happy, because when I get to office, we are going to not charge taxes on tips, and we're going to do that right away, first thing in office.

Trevor Sikes: From there, Republicans, and even some Democrats, took this pledge and ran with it, incorporating a version of it into the One Big Beautiful Bill Act.

That bill, which passed last July, allows single filers who earn up to $150,000, and joint filers who earn up to $300,000, to deduct up to $25,000 in cash tips that are voluntarily paid to the worker. However, the messaging around this deduction has been criticized as deceptive and has made some workers feel a bit misled as to what the effect of the provision really has on their taxes.

Rep. Steven Horsford of Nevada [D], in particular, has been a vocal opponent of this provision. His district includes parts of Las Vegas, and he spoke with us when the bill first passed.

Rep. Steven Horsford: I represent the most tipped workers by percentage than any other jurisdiction in the country. And because of that, I meet with and listen to tipped workers, hospitality workers, almost every day. And what they tell me is they need relief. Whether it's here in Nevada or across the country, there are some tipped workers who make as little as $2.13 an hour. Yeah, I said that — $2.13 an hour. We have a subminimum wage that has not been increased since 1991.

What is the Republican provision now that's signed into law? It caps it at $25,000. It's actually a deduction, not no tax on tips. It's a deduction against your federal income. And three, most egregiously, it sunsets in three years. It is not permanent like the tax break for billionaires and to big corporations. It is a failed campaign promise that Donald Trump made to tipped workers. He has not delivered on that, just like he hasn't delivered on no tax on Social Security and no tax on overtime. And now the truth is coming out, and I can tell you that tipped workers, workers who work overtime, and Social Security recipients really feel betrayed.

Trevor Sikes: Now, one year into this new provision, are Horsford's sentiments true? Morgan seems to think so.

Morgan Harms: No one really explained it to me. At first I really wasn't catching on because it's like you don't really pay attention to your pay stubs. You're just like, "OK, I got a paycheck. I got to figure out how I'm going to make this stretch." But once I started actually adding up my tips each night, I was like, "OK, well, this week I made this much, so I know my paycheck will at least be this much." And then it wasn't. It was less. It's like, "Well, how is that?" I feel like it's really misleading, and everyone's like, "Oh, you don't have to pay taxes out of your tips and this and this." And it's like, "Yeah, but they're still taking a significant amount of taxes out of my checks, and I'm still about getting paid the same as I was before." Sometimes, if it's a really good pay period, I might bring home an extra $200, but really, it's not much of a difference. So, I believe the name is just so misleading. Like, "Oh, you're not going to have to pay taxes on tips and it's going to be wonderful." And I mean, maybe for some servers it's fabulous. It's the best thing that ever happened. But me, personally, I just don't think it is.

Trevor Sikes: So, where does the frustration around this deduction stem from? Michael Chittenden, an attorney with Covington & Burling, has some theories.

Michael Chittenden: There was an expectation on the part of employees, or at least some employees, that they would immediately see their paychecks go up when the deduction was enacted. I think there was a lot of press coverage about the deduction, so there was some expectation they would see their paychecks go up. And that wasn't the case, because there was no change to the withholding tables at all to account for the deduction until 2026. As a result, I think there was some, maybe, disenchantment on the part of some employees upfront.

Trevor Sikes: Not to mention the confusion around what kind of tips qualify, how the federal and state taxes differ, and the fact that the deduction expires in 2028. For example, only those tips that are voluntary are eligible for the deduction, meaning that mandatory gratuities and service fees charged at various places, including many restaurants, are excluded.

Throughout my conversations, including a follow-up with Morgan, it became clear that there was very little awareness surrounding this exclusion. And many of the workers who received tips from automatic gratuities were actually unaware that those tips weren't eligible for the deduction.

And state taxation adds to the perplexity. Since only some states have added a "no tax on tips" to their own state income tax rules, there are still a lot of states where residents will be forced to pay up at the state level.

Matt Catchpole, owner of the South Carolina restaurant group Panhandle Slam Hospitality, notes how confusing the state rules are.

Matt Catchpole: I think there's a fundamental weirdness with whether or not a tip is a gratuity or a service charge or a gift or a whatever to begin with. And I think that each state has its own unique, awkward definitions for those things that allow them to tax it, if possible.

Trevor Sikes: Another source of confusion is that there's also this limit to the occupations that qualify for tips. Tips that are received from jobs that are considered what's called a specified service or trade business, also known as an SSTB, aren't eligible for the deduction. Now, SSTBs in this context usually refer to the job that's based on the reputation or skill of one or more of its employees or owners. Think of a lawyer, a barber, or even a podcaster. However, there is indefinite relief from this exclusion until the Treasury and IRS release further guidance regarding SSTBs.

Conversations with tax professionals and those familiar with the tips deduction following the 2025 tax season have highlighted one consistent theme: that there are a lot of taxpayers that weren't aware that not all of their tips could be deducted.

So, how did the deduction shape up in this year's filing season? Well, according to Treasury, over 7.5 million filers claimed the tips deduction, with an average deduction of more than $7,000. The figures from this year's tax filing season show an overall increase in the average refund amount received and the total number of refunds given, as compared to the previous year's filing season.

To the White House, this is seen as a win. Kush Desai, their spokesperson, citing an exaggerated figure, told us that "the fact that tens of millions of taxpayers have taken advantage of the president's signature No Tax on Tips policy reinforces how this provision is directly benefiting working-class Americans."

However, does this match up with what the tipped workers we spoke to saw? Jim Toole, a clubhouse manager for the Lancaster Stormers, an American professional baseball team in Pennsylvania, hasn't seen much change.

Jim Toole: Well, for me, I think it's probably had a minimal effect. I mean, it certainly helps, but it's not a big difference for me.

Trevor Sikes: Morgan had an even stronger reaction.

Morgan Harms: I was just so distraught when I got my taxes, because I knew I wasn't going to get that much back, because I'm like, "OK, they're not taking as much taxes out." But honestly, if you look at my pay stub before, and then like — well, now, I mean — and then before they started taking the no taxes out on tips, it's really not much of a difference. Granted, my paychecks, I might be bringing home maybe $200 more. And I know it's like, "Oh, gosh, Morgan, at the end of the year..." But it's like I'm used to having that, and then at the end of the year getting a big tax return, which I rely on that tax return, too, to kind of catch up on bills and be able to put money in the savings. Because Arlington's expensive, and when you have kids and responsibilities, that's a lot.

So, tax time is something where I'm like, "OK, at least I know I'll be caught up for the rest of the year. I'll be OK." And then only getting way less than I'm used to. It's like, "Wow, so now I'm really" — I feel like I'm struggling more now than I was before they did the no taxes on tips.

I ask a couple other servers like, "Hey, how was your guys' tax return?" And everyone was just like, "I didn't get anything back." And it's just sad. It's like, "Wow, we went from getting a good amount of money and being able to stay afloat financially to now just saving each dollar again and trying to figure it out, picking up more shifts, and so on."

Trevor Sikes: Now, after all this, what does the future look like for the "no tax on tips" deduction? Jim has a positive outlook on it.

Jim Toole: My general thoughts are every little bit helps. People who work with tips, especially — I mean, obviously, my first thought would be waitresses and bartenders. People who work — I mean, tips are a vital part of their income, so the more they can keep, the better. I mean, for them, I think it's a big help. It might be for some people who are strictly a waitress or a bartender and that's only your primary job, it could be a few hundred bucks a week extra, depending on your tip level.

Trevor Sikes: Michael Chittenden also sees the positives, although he's uncertain about how some of the intended benefits will work out.

Michael Chittenden: It's interesting. I mean, I think that, certainly, for those who benefit from it, it can be a real benefit. How many are actually benefiting from it is, I think, hard to say. I think we've seen some preliminary data from last year's returns that those who are claiming it on the return tend to be those, I think, you would expect to be claiming it on the return.

But there was some data before, when it was originally proposed, that indicated a significant portion of tipped workers don't pay federal income tax anyway, and so the deduction doesn't really do anything for them because they're not paying federal income tax anyhow.

Now, maybe there's some additional reporting of tips by people who were not reporting their tips before, because they don't have to pay federal income tax on it. And so, that might bring more money into the Social Security Trust Fund. I'm somewhat skeptical of that, personally, but it could happen. That would be a great thing. I think the Social Security Trust Fund needs all the money it can get in terms of people paying the taxes they owe into it. It doesn't have an excess amount of funding in it right now. So, those would be positives.

But certainly, for those who benefit from it, who do pay federal income tax, it's a significant deduction. It's a lot of tax savings, even if maybe not as much as some people expected. When you hear the top-line number, $25,000 in tips, and it's tax free. But I think for many of those people that are at a 10, 12 percent rate or something like that, which is $2,500 in savings, it's not insignificant, but it's maybe not as much as you would think when you hear $25,000.

Trevor Sikes: However, Matt Catchpole has a different take.

Matt Catchpole: To me, I'm not sure that there's a measurable difference. I don't feel like we have more money; I don't feel like the people that we're paying are taking home significantly more, but you would think that they would have to be, because theoretically they're not paying in. It seems like the biggest definable impact to me would be that they are, effectively, on paper, at a federal level, reducing their income, which means they should be paying less Social Security, or having that come out of their check. And, I guess, maybe that means there could be a couple extra bucks in their pocket, but it also kind of feels like they're going to be upset 20, 30 years from now when there's no Social Security for them.

Trevor Sikes: Morgan agrees.

Morgan Harms: A lot of people don't understand. And even my sister is like, "Oh, this is going to be the greatest thing that happens to you." And it's like, "Yeah, well, is it really?"

David D. Stewart: That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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