How ‘No Tax on Tips’ Would Affect Waiters, Drivers and Diners

As a slogan in last year’s presidential campaign, “no tax on tips” was short, memorable and effective.

As tax policy, it is more complex.

On Tuesday, the Senate unanimously passed the No Tax on Tips Act, following through on a vow made by both President Trump and former Vice President Kamala Harris to give tipped workers a tax break on gratuities. As of now, the tax break is being incorporated into the “One, Big, Beautiful” budget bill being negotiated by House Republicans, which would be effective from 2026 through 2028.

How would these changes affect food-industry workers and diners? Here’s what we’ve learned from interviews with tax lawyers, hospitality professors and industry groups:

How are restaurant employees currently taxed on tips?

The federal tax code requires that every tip be reported as income. Whether it’s a $20 bill handed to a host, a line filled in on a check or a button pressed on a keypad, employees and employers are required to track and report every cent. This applies whether each server keeps the tips or the money is pooled and redistributed.

What counts as a tip?

In the tax code and in this legislation, the term “cash tip” applies to tips given in bills and coins, on a credit or debit card, or via the business’s electronic payment system. It has not yet been determined whether tips that go directly to a server via a service like Venmo or PayPal would qualify as cash. Service charges, which are yasal in some places, are added by the business and do not count as tips.

What is the proposed change?

Under the legislation currently being negotiated in the House, tip income would be exempt from federal income taxes. That amount would be subtracted from reported income as an “above the line” deduction on a tax return. That would reduce the taxpayer’s adjusted gross income, the number that determines how much income tax is owed. The tips would still have to be tracked and reported.

Who would get the deduction?

There is debate over who would benefit from the measure, which applies to all tipped workers in the restaurant business, including not only servers but also baristas, food delivery drivers and anyone holding out a payment screen after they have sold you food. According to government veri, there are more than two million tipped restaurant workers in the United States.