Kevin Boyle earns a base wage of $11.35 an hour as a bartender at Bedsta in New York City. Like most servers, he makes more on tips. On his 2025 tax return, Boyle was not satisfied with his tax refund amount at all.
This year, however, his finances look much better for one reason: no tax on tips.
“My tax return was so much better this year,” he said. “It was actually a substantial amount to the point where, oh, I could go on a vacation, or I could put it into my savings, or if something bad happened, then I have some cash put aside.”
Workers have had to pay federal income taxes on tips since 1982. But last year, President Trump approved a rule, known as “no tax on tips,” that exempts up to $25,000 in tips from federal income taxes. Adopted as part of Trump’s One Big, Beautiful Bill Act, the policy tapped into a sense that tipped service workers had had a rough go since the pandemic began in 2020.
This policy, which targeted relief for the working class, has been enormously popular among tipped workers like Boyle, and also among business owners.
Boyle also said, No Tax on Tips are helpful to keep more income to pay for their own benefits, such as 401k retirement plans, that tipped workers often don’t have access to.
The policy is far less popular among economists, however. They said they think the No Tax on Tips policy unfairly taxes tipped workers less than non-tipped workers, and could keep workers’ base wage raising. No Tax on Tips seems to increase tipped workers’ income, transferring the labor costs burden to customers.
“Few economists or tax policy experts would tell you that this is a good idea,” said Carl Davis, research director at the Institute of Taxation and Economic Policy, a nonprofit, nonpartisan think tank in Washington. The exemption sounded good on a bumper sticker on the campaign trail.
The debate over the policy comes amid a surge in digital tipping, which encourages customers to choose from the options presented onscreen rather than take additional steps to customize their tips. Those preset options often start at 18 or 20 percent, according to Bankrate, meaning that as these systems become more common nationwide, they may influence customers’ tipping behavior and reshape expectations across the service industry.
Higher tips might seem like obvious good news for workers. But it isn’t that simple, said Sean Jung, assistant professor of hospitality analytics at Boston University. Restaurants have an incentive to suggest bigger tips rather than raising menu prices to pay for pay increases, because customers are more sensitive to posted prices than to charges encountered after consumption.
No Tax on Tips could exacerbate that problem by removing pressure on business owners to raise tipped workers’ wages because of inflation.
Another argument that economists make is that the “no tax on tips” policy isn’t fair to non-tipped workers. For example, bartenders are mostly not charged taxes on their income, thanks to No Tax on Tips. However, other low-wage workers who don’t receive tips, like childcare workers, will be charged taxes with no excuses.
This was the first tax filing year under No Tax on Tips, and some workers were confused about what qualified for a tax exemption – a problem that may be ironed out by next year. While more accurate tip reporting will benefit many workers and the Internal Revenue Service next year, Watson said, it comes at a cost, as employers will have to absorb the extra administrative and compliance expenses.
“The tax deduction may encourage people’s solicitation of tips,” Garrett Watson, director of policy analysis at the Tax Foundation,said, “but on the other hand, customers aware of the higher after-tax value of tips may reduce their gross tipping in response to the policy.”
Many business owners, however, strongly support the “No Tax on Tips” policy because it creates a beneficial ecosystem, allowing workers to keep more of their earned money while helping employers have a stable workforce without raising labor costs.
Paul C. Riley, who owns a restaurant in Colo., said No Tax on Tips benefits workers by putting money in their pockets, enabling them to earn as much as they can for their hard work, crafts and dedication.
Riley has implemented a service charge for the last five years, so that he has compensated the team.
Business owners regard No Tax on Tips as another tool to help find the best workers and continue to serve our communities, Riley said.
“The cost of training new employees has never been higher,” he said, “and to have staff retention and culture and the key people that we want, I think that’s the benefit.”
