A new federal tax break promises to put more money in the pockets of tipped workers, but some in the service industry say they're cautious about celebrating just yet.
What the New Law Does
Part of President Donald Trump's One Big Beautiful Bill Act, the "no tax on tips" provision offers a deduction worth up to $25,000 for qualifying workers. According to the IRS, the deduction is available from 2025 through 2028, and it applies whether or not you itemize deductions.
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The benefit begins to phase out once a worker's modified adjusted gross income exceeds $150,000, or $300,000 for joint filers. It's available to both employees and certain self-employed individuals — but with restrictions. For example, self-employed people and employees in a Specified Service Trade or Business under section 199A of the tax code, such as certain professional services, aren't eligible.
Who Qualifies — and What Counts as a Tip
Under the IRS rules, "qualified tips" are voluntary cash or credit card gratuities received directly from customers or through a tip-sharing arrangement. To be eligible, tips must be reported on a Form W-2, Form 1099, or similar IRS-recognized statement.
According to CNBC, automatic service charges, such as mandatory gratuity for large parties, may not qualify — something that could cause confusion for workers if those charges are combined with regular tips on tax forms.
The IRS is expected to publish an official list of qualifying occupations by Oct. 2.
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Workers Say Details Are Unclear
Some tipped workers say they're unsure how the deduction will actually affect their paychecks. Maddy Lopez, a bartender in Los Angeles with 25 years in the industry, told CNBC that her first thought was the tax break "feels a little too good to be true." She worries there could be a "catch" once the fine print becomes clear.
T. Cooper, a hair and makeup stylist in New York City, said the measure is "being perceived incorrectly" by some in her industry.
"A lot of people don't understand that you will still have to pay the tax on tips," she told CNBC. Even with the deduction, workers may still owe payroll taxes for Medicare and Social Security, as well as possible state income taxes.
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The Bigger Picture: Tipping Trends
Even with a tax break, some workers say declining tips are eating into earnings. A report from Square found that the average tip at restaurants, cafés, and bars fell to 14.99% in Q2, down from 15.17% the previous quarter.
Tipping fatigue is also growing among customers. A Bankrate survey found that 41% of Americans said tipping is "out of control," up from 35% last year.
Lopez said that smaller checks in restaurants are also reducing take-home pay. She told CNBC that previously, a $200 tab could earn $40 in tips. But with people spending less when they go out, she said a typical tab may be closer to $100 and "you're only making $20 on the same guest."
What's Next
For now, workers and employers alike are waiting for the IRS to clarify reporting rules and provide the official list of eligible occupations. Until then, experts say the safest approach is to keep reporting tips accurately and watch for new guidance in the fall.
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