One of the most–discussed policies in the Republican-passed One Big Beautiful Bill Act (OBBBA) is the “no tax on tips” provision, which eliminates federal income taxes on the first $25,000 of tips earned by workers making less than $150,000 per year ($300,000 for married filers). Despite appearances, this provision will benefit only a small number of workers, and many of those workers will disproportionately suffer financial losses due to the OBBBA’s severe program cuts. The net result is that tipped workers are unlikely to experience significant gains from the OBBBA overall.
How will the OBBBA affect typical tipped workers?
Because most workers who earn tips are relatively low income, “no tax on tips” has raised hopes that the OBBBA will benefit low-income Americans. For instance, analysts at The Budget Lab at Yale find that low-wage workers are several times more likely to receive tips than are high earners. However, tipped workers are vulnerable to other policy changes in the OBBBA that will offset the benefit of the tips deduction. To illustrate the wide-ranging effects that coming policy changes will have on tipped workers, the Center for American Progress offers three example profiles that show how households’ balance sheets will change in early 2026. Examples are based on the most recent labor market, program eligibility, and tax expenditure data.
Example 1: Peggy, who earns $22,250 per year, including $12,000 in tips
Peggy is a Michigan bartender who works part time while juggling her caregiving duties for her elderly father. She earns the national average wage for a bartender ($17.83 per hour) over the 24 hours per week that she works. She earns $12,000 in tips as part of her annual income of $22,250. However, Peggy does not owe any federal taxes because her income is below her standard deduction, so she will not benefit from deducting any of her $12,000 in tips.
Like Peggy, more than one-third of tipped workers make too little to benefit from a deduction for tips.
Example 2: Jack, who earns $80,000 per year, including $25,000 in tips
Jack is a 60-year-old high-end waiter in Omaha, Nebraska. He makes $80,000 per year, more than half of which is tips, which puts him comfortably in the top 10 percent of all waiters by total earnings. Under the OBBBA, he will be able to deduct $25,000 in tips, which is the maximum allowable, lowering his federal taxes by $5,500. However, Jack buys his health insurance on his own through the Affordable Care Act (ACA) health insurance marketplace, and starting in 2026, he will no longer receive $7,513 in enhanced premium tax credits toward reducing his premium. This will eclipse his gains under “no tax on tips.”
Like Jack, approximately two-thirds of all U.S. accommodation and food service workers do not have access to health insurance through their employer, meaning they often are covered by ACA marketplace plans or Medicaid.
Example 3: Marian, who earns $28,000 per year, including $10,000 in tips
Marian is a 56-year-old hairdresser living in Erie, Pennsylvania, with her 17-year-old child and elderly mother, who is on Social Security. Marian recently separated from her husband, and the Supplemental Nutrition Assistance Program (SNAP) is helping her family afford food in a difficult time. She makes $28,000 yearly, including $10,000 in tips. For most of the year, she works full time at the median earnings—$16.81 per hour—for a hairdresser. However, like most tipped workers, Marian has variable hours that are out of her control. In particular, many of her older clients depart during the winter months, so her work hours fall below 20 hours per week until spring. Though Marian can deduct the $10,000 she makes in tips, the tax savings of $1,007 are less than the $1,620 in monthly SNAP assistance her family will lose in 2026 due to the OBBBA’s SNAP paperwork requirements, which require that adults ages 55 to 65 and parents of children ages 14 and older certify that they consistently work 20 hours per week.
Like Marian, low-income and care and service workers have high volatility in their hours worked, putting them at risk of losing SNAP or Medicaid benefits because of the OBBBA’s paperwork requirements.
‘No tax on tips’ is of limited benefit to tipped workers
The OBBBA’s deductions for working people, including for tips and overtime pay, are not well-designed to benefit people most in need and are subject to strict limits. For instance, “no tax on tips” is a deduction from federal income taxes and does not affect federal payroll taxes or other taxes, which make up the majority of taxes that working- and middle-class Americans pay. The Budget Lab at Yale estimated that more than one-third of tipped workers do not owe federal income taxes and therefore will not benefit from the tips deduction.
Even for tipped workers who have a tax liability, “no tax on tips” is regressive. The benefit from a tax deduction depends on a taxpayer’s marginal rate, so tax deductions such as the tips deduction give greater benefits to taxpayers in high-income brackets. This is one reason why Jack’s household receives a proportionally larger deduction than Marian’s. Other policies, such as minimum wage increases or refundable tax credits, would deliver the most benefit to the lowest-income affected people and would have a far broader impact than “no tax on tips.”
It is instructive to compare “no tax on tips” to the OBBBA’s tax break for pass-through business owners—business owners who pay federal income taxes for their business’ income on their personal taxes. “No tax on tips” has strict requirements limiting the deduction to $25,000, sunsetting it after 2028, and disallowing higher-income taxpayers from claiming it. While these may be sensible policy choices, the OBBBA’s deduction for pass-through businesses has few such guardrails. The OBBBA permanently reauthorizes and expands the pass-through business deduction, a tax giveaway to business owners that effectively sets no limit on the amount that each taxpayer can deduct, no upper income limit for most businesspeople, and is permanent.
“No tax on tips” is a relatively small provision in the OBBBA by fiscal impact. The tips deduction is projected to cost $32 billion, compared with the $737 billion pass-through deduction, and the overall $4.5 trillion total of OBBBA tax cuts. “No tax on tips” is 4 percent the size of the deduction for pass-through business owners and less than 1 percent of all the tax cuts in the legislation. Even for tipped workers, it is likely to be a minor benefit, easily outweighed by the legislation’s other impacts.
Medicaid and SNAP cuts will affect tipped workers
About 4 million workers currently work for tips, representing 2.5 percent of the total 160 million American workers. Original CAP analysis using data from the 2023 American Community Survey (see Figures 3 and 4) finds that in six tipped occupations, together accounting for the majority of tipped workers, 30 percent of workers’ health care was covered by Medicaid or ACA subsidies, and 15 percent of workers were in a household receiving SNAP.*
In six tipped occupations, together accounting for the majority of tipped workers, 30 percent of workers’ health care was covered by Medicaid or ACA subsidies, and 15 percent of workers were in a household receiving SNAP.
Original CAP analysis using data from the 2023 American Community Survey.
Waiters and bartenders are at particular risk because about one-third work less than 25 hours in their typical week. Taxi and ride-hail drivers are particularly likely to rely on social safety net programs to supplement their low wages, with nearly 40 percent receiving Medicaid or health insurance subsidies and 22 percent in households receiving SNAP. However, CAP’s estimates (see Figure 3) are likely conservative because people often underreport public assistance usage in surveys.
Nearly 282,000 workers in these six tipped occupations may be at risk of losing their Medicaid coverage, and more than 168,000 workers at risk of losing their SNAP, due to their usual weekly hours falling below or near the OBBBA’s 20-hour work requirement threshold. (see Figure 4) This raises the likelihood that they will not meet strict work and paperwork requirements, even though they are gainfully employed.
The OBBBA’s cuts to SNAP will total up to $186 billion over the next decade, or almost six times the impact of “no tax on tips,” while the legislation’s cuts to Medicaid and the Children’s Health Insurance Program (CHIP) total about $900 billion, or 28 times the impact of “no tax on tips.” The sheer size of these cuts will likely have a larger impact on tipped workers than a deduction for tips, given these workers’ high program usage.
The OBBBA’s cuts to SNAP will total up to $186 billion over the next decade, or almost six times the impact of “no tax on tips,” while the legislation’s cuts to Medicaid and the Children’s Health Insurance Program (CHIP) total about $900 billion, or 28 times the impact of “no tax on tips.”
Congressional Budget Office, "Estimated Budgetary Effects of Public Law 119-21, to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14, Relative to CBO’s January 2025 Baseline" (2025).
“No tax on tips” is a symbolic tax cut that is very limited and poorly targets the workers who need tax relief the most. In addition, “no tax on tips” does not change the fact that the OBBBA is projected to lower the after-tax-and-transfer income of the poorest Americans. As the examples above show, under the OBBBA many tipped workers will come out behind in the coming years.
The author would like to thank Kyle Ross and Sara Estep of the Center for American Progress for their important contributions to this piece.
* The occupations are: 1) waiters and waitresses; 2) bartenders; 3) barbers; 4) hairdressers, hairstylists, and cosmetologists; 5) manicurists and pedicurists, and 6) taxi drivers (includes ride-hail).