Day 2: No Taxes on Tips—A Win for Service Workers (But Not for Everyone)
Welcome back to our series on how the One Big Beautiful Bill Act (OBBBA) is reshaping the tax landscape.
Yesterday, we covered the higher SALT deduction cap. Today, we’re focusing on a change that’s generating buzz among millions of workers: no federal income tax on tips.
It’s great news for service employees—but there’s important fine print you should know.
What Changed?
Under previous law, tips were considered taxable income, just like wages.
Waitstaff, bartenders, baristas, hair stylists, and other service workers were required to report tips as income and pay federal income tax on those amounts.
This often caused unexpected tax bills if workers didn’t track or save enough to cover taxes on cash tips.
Under the OBBBA:
Tips and overtime pay are exempt from federal income tax.
Workers no longer owe federal income tax on money earned as tips.
Employers may still be required to track tip income for reporting purposes.
According to Kiplinger, this is one of the most direct benefits for lower- and middle-income workers in the new law. (Kiplinger)
Who Benefits?
Service industry workers (restaurants, hospitality, salons, bars, etc.) who receive a significant portion of their income as tips.
Hourly employees earning frequent overtime who will also benefit from tax-free overtime pay.
Lower- and middle-income earners who will keep more of their earnings and potentially reduce the risk of underpayment penalties.
For example, a restaurant server earning $15,000 a year in tips could save roughly $1,800–$2,200 in federal taxes, depending on their tax bracket.
Who Should Still Be Cautious?
Social Security and Medicare taxes still apply. Tips remain subject to FICA taxes, so workers will still see payroll deductions.
State income taxes may still apply. Some states may continue to tax tips even if the federal government does not.
Higher earners in the service industry might benefit less if their wages exceed certain limits tied to other tax provisions.
Recordkeeping remains important. Workers should still track tips for employer reporting, even if not taxable federally.
Why Tax Planning Matters Now More Than Ever
Tax-free tips sound like a simple win—but planning is still essential. Tax planning helps you:
Understand which taxes still apply to your tip income, like Social Security and Medicare.
Determine if state taxes will reduce your savings.
Adjust your withholding or estimated payments, since you may owe less federal tax but still owe other taxes.
Incorporate your tax-free tips into broader planning goals like qualifying for credits or maximizing deductions.
Tax planning helps ensure you keep as much of your hard-earned income as possible—and avoid surprises at tax time.
Bottom line: The OBBBA’s tax-free tips provision offers significant savings for millions of workers—but it’s not quite “tax-free everything.” Smart planning helps you understand exactly how much you’ll save—and where you still owe taxes.
Are you a service worker wondering how the new law affects your taxes? Let’s create a personalized tax plan to help you keep more of your income. Schedule a discovery call to learn how our tax planning services can help you take advantage of the OBBBA changes.
Up next: Day 3 – Changes in Taxable Social Security: What Retirees Need to Know (And Who Could Pay More
