Donald Trump Signs Law Making Tips Tax-Free
On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (OBBB), one of the most comprehensive tax packages in recent years. The legislation not only makes permanent several major tax reductions set to expire at the end of 2025 but also introduces new benefits aimed at supporting workers, families, and small businesses across the United States.
By securing these long-standing tax cuts, the OBBB ensures individuals and companies can continue operating under a lower and more predictable tax structure. A key feature of the law is the expansion of taxpayer-focused deductions, including tax-free overtime pay and an additional deduction for senior citizens.
No Tax on Tips Act
The provision generating the most national attention is the No Tax on Tips Act, which supports millions of Americans whose earnings depend heavily on gratuities. Under prior law, all tips—whether cash, added to credit card bills, or shared among staff—were taxable. Employers were required to withhold federal income taxes accordingly.
Under the new law, tips must still be reported but are exempt from federal income tax, directly increasing the take-home pay of service industry employees. Voluntary tips qualify for the exemption, while automatic service charges and mandatory gratuities remain taxable. The law excludes Specified Service Trades or Businesses (SSTBs), including attorneys, consultants, financial advisors, and entertainers, ensuring the benefit targets those who rely on gratuities for daily income.
Supporters argue the change reduces administrative burdens for small businesses, especially in industries with fluctuating payroll obligations, while improving financial stability for employees.
Impact on Workers
The law has been especially well received by restaurant staff, bartenders, hotel employees, delivery drivers, rideshare workers, and salon professionals. Many live paycheck to paycheck and rely on unpredictable tips, so the tax relief directly boosts their earnings. While tax-free overtime and tip provisions function as deductions rather than complete tax eliminations, they can significantly increase net income for millions of workers.
Senator Ted Cruz of Texas, a lead sponsor, emphasized the fairness of the legislation:
“These workers are putting in long hours and living paycheck to paycheck. They deserve to keep more of what they earn.”
Co-sponsor Senator Jacky Rosen of Nevada highlighted its importance for states dependent on tourism and hospitality:
“Service workers are the backbone of the economy. This bill offers them the respect and support they deserve.”
Financial Implications
The Congressional Budget Office (CBO) projects the full array of OBBB tax changes will increase the federal deficit by roughly $3.4 trillion over the next decade. While fiscal debates will continue, the immediate benefit for tipped workers and employees earning variable income is clear.
Conclusion
The One Big Beautiful Bill Act represents a broad effort to modernize tax policy, strengthen the workforce, and provide targeted relief for the service economy. Millions of Americans who rely on tips, overtime, and variable earnings will now benefit from a more supportive and predictable tax environment, improving financial security and take-home pay across the nation.