Here's What The 'No Tax On Tips' Rule Really Means For Your Restaurant Bill

In July 2025, U.S. lawmakers passed President Donald Trump's One Big Beautiful Bill, a fiscal package that introduced a temporary policy known as "No Tax on Tips." Under this new law, starting in 2025 and lasting through Trump's presidency until 2028, those who earn tips in approved occupations in the restaurant and hospitality industry have the opportunity to deduct them from their federal income.  For diners — many of whom are already worried about how much it costs to eat out — this could sound like tipping expectations, and their restaurant bill could increase. This is not the case.

Foodies need not worry — this law will primarily affect employees in the service industry, and business owners to a small degree. For the paying customer, whether you support tipping culture or not, not much should change directly in tipping behavior or menu pricing. If anything, it gives customers more peace of mind knowing that all or most of their tip will actually go to staff members and not be eaten up by taxes. 

Most importantly, the law is intended to financially support hardworking waiters, servers, and bartenders who often make over 50% of their income from tips, as the National Employment Law Project reports. Tipping culture in the United States is controversial, however, with many arguing that restaurants and food service businesses should pay their employees a living wage so they don't have to rely on tips from customers. It's possible that these circumstances could change in the future, but for now, the new law allows tipped workers to keep more of the money they're given for their good service.

If restaurants were not tracking tips correctly before, now there is a clear incentive to do so. Sometimes tips, especially cash ones, go unreported when taxes are filed. Naturally, the No Tax on Tips deduction only applies when tips are correctly tracked and reported with a W-2 (for payroll employees) or 1099 form (for self-employed workers). Employers, like restaurant or bar owners, are in charge of tracking and reporting tips and overtime pay, and employees are responsible for claiming the deduction when they complete their federal tax returns.

Something the new law does affect is automatic service fees for large groups dining at the restaurant. It's common practice to add a set gratuity — around 15% to 20% — to the bill of a table that has six or more diners. Larger groups are more work for the waitstaff, and this automatically applied fee ensures that they are getting compensated fairly. This automatic service fee is not eligible to be included in a server's tax deduction, so restaurants are now reconsidering this practice and exchanging the automatic service fee for a suggested tip amount.

There are limitations and exceptions to the No Tax on Tips law. Eligible employees may deduct up to $ 25,000 per year in tips from their taxable federal income. Tips can greatly vary by restaurant, and there are some cities where servers make more tips — yet, regardless of these factors, any quantity of earned tips above that figure will be taxed.  

For hospitality workers whose tips make up a large portion of their income, the new deduction can offer significant tax relief and a greater take-home pay. However, if an employee doesn't owe any federal tax, they may still need to pay payroll taxes and state income tax. Interestingly, the new law won't affect the lowest earners. According to The Budget Lab, over ⅓ of tipped workers are not required to pay federal taxes.

Employees who made more than $150,000 in the previous year cannot take advantage of the tax deduction. The law also tackles how higher-paying overtime is taxed. "No Tax on Overtime Premium Pay" allows a deduction for those who earn overtime pay that exceeds the standard 40 hours per week. This component of the law has a cap of $12,500 for those who file as "single" on their tax return, and $25,000 for joint filers.