Why Trump's 'No Tax on Tips' Deduction May Leave Some Tipped Workers Out

A proposed change to let tipped workers exclude tips from federal income tax could help millions this filing season — but not everyone who receives tips will see savings. Tax experts warn that eligibility, recordkeeping and the interaction with other taxes mean the benefit is not universal.

Proponents say a deduction for tips would lower taxable income for employees in restaurants, salons, hospitality and gig work where tips are a material part of pay. For many workers who properly report tips to employers and the IRS, the deduction could reduce what they owe on federal income tax. Yet experts emphasize the proposal’s scope matters: it typically would apply only to income tax, not to payroll taxes such as Social Security and Medicare, which are calculated differently and remain owed on tip income.

Several common situations could blunt or eliminate the advantage. Workers who receive mostly cash tips and fail to report them — a longstanding compliance issue — would not get the benefit unless they can substantiate that income. Those whose total taxable income is already offset by the standard deduction may see little or no additional reduction. High earners could face phaseouts or limits under broader tax rules, depending on how a law is written.

Employer-side rules also complicate the picture. Large restaurants often allocate tips across staff for payroll and tax purposes; allocated tips, pooled tips and employer tip credits have their own tax treatments and reporting requirements that may affect whether a worker benefits. State and local taxes are another factor: some jurisdictions may still tax tips even if the federal deduction applies.

Experts urge workers to keep careful records of tip income, including credit-card tip receipts and employer tip reports, and to consult tax preparers when filing. For many, the administrative burden of proving tip income could offset some of the perceived simplicity of a headline deduction. Policymakers and payroll providers would also need to clarify how the change interacts with withholding, benefits and unemployment calculations.

In short, while a "no tax on tips" deduction could provide meaningful relief to properly documented tipped workers, real-world complexities mean not every tipped employee will automatically benefit. Clarity in legislation and guidance from the IRS would be essential to ensure the policy reaches its intended recipients.