Donald Trump approved legislation making all tips tax-free.

However, the provision that has drawn the most national attention is the inclusion of the No Tax on Tips Act, a measure specifically designed to support the millions of Americans who depend on tips as a primary source of income.

According to projections from the Congressional Budget Office (CBO), the full array of tax changes within OBBB is expected to increase the federal deficit by approximately $3.4 trillion over the next decade, reflecting the scale and long-term financial impact of these tax reforms.

The passage of the OBBB has been especially well received by workers in the service and hospitality industries, including restaurant staff, bartenders, hotel employees, delivery drivers, rideshare workers, salon professionals, and many others whose earnings rely heavily on gratuities.

Supporters of the law argue that these workers—many of whom live paycheck to paycheck and face unpredictable earnings—deserve targeted tax relief that directly increases their take-home pay.

While the tax-free overtime and tip provisions function as deductions rather than full tax eliminations, they nevertheless have the potential to raise net income for millions of employees whose livelihoods depend on long hours and customer-based compensation.

Senator Ted Cruz of Texas, one of the lead sponsors of the bill, emphasized the equity and fairness goals behind the legislation.

“This is about fairness,” he said. “These workers are putting in long hours and living paycheck to paycheck.

They deserve to keep more of what they earn.” His co-sponsor, Senator Jacky Rosen of Nevada, highlighted the significance of the bill for states whose economies are deeply dependent on tourism and hospitality.

“Service workers are the backbone of the economy,” she noted. “This bill offers them the respect and support they deserve.”

The No Tax on Tips Act itself represents a significant amendment to the federal tax code.

Under pre-existing law, all tips—whether paid in cash, added to a credit card bill, or distributed through tip-sharing systems—must be reported as taxable income, and employers are required to withhold federal income taxes accordingly.

With the new provision under OBBB, tips would still need to be reported, but they would no longer be subject to federal income tax, giving tipped employees a meaningful boost in their net income.

Importantly, the law draws distinctions between different types of payments.

Only voluntary tips—those freely given by customers—qualify for the tax exemption.

Automatic service charges, such as mandatory gratuities added to large restaurant parties or hotel bills, do not count as tips and therefore remain fully taxable.

Additionally, the benefit does not apply to individuals in Specified Service Trades or Businesses (SSTBs), such as attorneys, consultants, financial advisors, entertainers, and other professionals whose income is primarily derived from skill, reputation, or specialized services rather than direct tipping from customers. Continue reading…