No tax on tips costs $31.7 billion. A third of tipped workers already owed nothing.
Summary
The 2025 tax law lets tipped workers deduct up to $25,000 a year, at a projected $31.7 billion cost to the Treasury over a decade. But of the roughly 4 million Americans working tipped jobs, 37% already owed no federal income tax in 2022 — a deduction cannot lower a bill that is already zero.
How the deduction is built
The mechanism, 26 U.S.C. §224, lets a worker deduct qualified tips from taxable income, up to $25,000 a year. It phases out for single filers above $150,000 in modified adjusted gross income and joint filers above $300,000 — reduced $100 for every $1,000 over the threshold — and it sunsets after December 31, 2028. Eligibility isn't self-declared: Treasury and the IRS finalized a list of more than 70 qualifying occupations in April 2026 — bartenders, hairdressers, tour guides, gas pump attendants — sorted into eight categories under a new Treasury Tipped Occupation Code system. Tip income earned outside that list doesn't qualify, however real the tip.
It's one of three similarly-framed "no tax on X" provisions the same law created for workers, and tips is the cheapest of the three:
View data as table
| No tax on overtime | $89.6B | FY2025-2034, JCT |
|---|---|---|
| No tax on tips | $31.7B | FY2025-2034, JCT |
| No tax on car loan interest | $30.6B | FY2025-2034, JCT |
No tax on overtime, scored in the same table, costs $89.6 billion — nearly three times as much — because far more workers log overtime hours than report tips. No tax on car loan interest costs about the same as tips, $30.6 billion, for an entirely different population: anyone financing a new vehicle. All three are financed the same way and expire the same year.
Who the deduction actually reaches
The tipped workforce is smaller than the debate around it suggests: roughly 4 million people, about 2.5% of all U.S. employment, according to The Budget Lab at Yale's analysis of Census earnings data. And a deduction, by design, only helps a worker who owes tax to begin with. The same Budget Lab analysis, drawing on 2023 Current Population Survey data, found that 37% of tipped workers in 2022 were in tax units that paid zero federal individual income tax before credits — mostly because their total household income was low enough that standard deductions and credits already zeroed out the bill.
View data as table
| Owed some federal income tax, 2022 | 63% | Budget Lab, CPS ASEC |
|---|---|---|
| Owed $0 federal income tax, 2022 | 37% | Budget Lab, CPS ASEC |
That's the mechanical flaw in a deduction as the delivery vehicle: it reduces taxable income, so its value scales with how much tax a worker would otherwise owe. A worker with no tax liability gets nothing. A worker in a higher bracket, with tips as a smaller share of a larger total income, saves more per dollar deducted than a worker for whom tips are most of the paycheck. The lowest-earning third of the group this was named for is mathematically locked out before a single 1040 is filed.
The takeaway
- It's temporary and capped, not an open-ended tax cut. $25,000 a year, phased out above $150,000/$300,000 in income, gone after 2028.
- Eligibility runs through a government list, not a worker's paycheck. Only tip income earned in one of 70-plus -designated occupations qualifies, as finalized in April 2026.
- A third of the target population was excluded by arithmetic, not oversight. 37% of tipped workers already owed no federal income tax in 2022 — a deduction cannot lower a bill that's already zero.
- It's the cheapest of the law's three worker-facing "no tax" cuts. At $31.7 billion over a decade, tips costs a third of what the overtime deduction costs in the same law.
Cost figures reflect the enacted text as scored by the Joint Committee on Taxation on July 1, 2025 (JCX-34-25/JCX-35-25); tipped-workforce and tax-liability figures are Budget Lab estimates for 2022–2023 and predate the law's final occupation list.
Sources
- Joint Committee on Taxation, Estimated Revenue Effects of the Tax Provisions of Title VII — Finance — the FY2025–2034 cost of "no tax on tips" ($31.7B), "no tax on overtime" ($89.6B), and "no tax on car loan interest" ($30.6B), scored against both a current-policy and a present-law baseline for the Senate-passed, enacted text. JCX-34-25 · JCX-35-25
- The Budget Lab at Yale, "The 'No Tax on Tips Act': Background on Tipped Workers" — the ~4 million tipped-workforce estimate (2023) and the 37% of tipped workers who owed zero federal income tax in 2022, both drawn from CPS ASEC data. budgetlab.yale.edu
- 26 U.S.C. §224, Qualified Tips — the statutory $25,000 deduction cap and the modified-adjusted-gross-income phase-out schedule. uscode.house.gov
- Internal Revenue Service, Treasury, issue final regulations listing occupations where workers customarily and regularly receive tips (IR-2026-49, April 10, 2026) — the 70-plus qualifying occupations and the eight Treasury Tipped Occupation Code categories. irs.gov
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"No tax on tips" was signed into law on July 4, 2025, as part of the One Big Beautiful Bill Act, and by the Joint Committee on Taxation's own scoring it is not free: $31.7 billion in forgone federal revenue over the next decade. The design is narrow by construction — a capped deduction, gated to a government list of qualifying jobs, that expires in 2028. It was sold as relief for tipped workers. Run the numbers on the tipped workforce itself and a large share of them were never going to see a dollar of it.