What Ending Taxes on Tips Could Mean for Workers and Tippers
A federal proposal that would eliminate income taxes on tips could change how millions of Americans are paid—and how the rest of us tip.
The change is part of a broader tax bill currently being voted on in Congress. The tips exemption, which has had bipartisan support and is expected to cost about $40 billion over 10 years, is among the most visible provisions, touching workers in restaurants, salons, and other customer-facing jobs.
“This kind of tax policy is about creating incentives,” said Gene Kovacs ’93, who has taught financial accounting at Babson. “In this case, it’s a way to direct more disposable income to lower-wage earners.”
From Cash to Cards
Pressure to create a tax break for tipped workers has grown as the use of cash tipping dwindled, said Norm Richter, an adjunct lecturer at Babson in the Accounting and Law Division and a former chief tax executive in the private sector and tax policy author in Washington, D.C.
“Tips have been taxed in this country for more than a century, but it was difficult to enforce,” Richter said.
Under the current law, employers must report tip income, and workers are responsible for paying income taxes on those earnings. A 1982 rule change forced employers of tipped workers to report tips as at least 8% of gross receipts, which boosted tax collections slightly.
But it was the demise of cash tips and the rise of digital transactions, such as credit cards and Venmo, that created a substantial paper trail and made it increasingly difficult for tipped workers to avoid reporting their income.
“There’s too much of a paper trail to ignore, so what used to be tax-free tips are no longer tax-free,” Richter said.
New Rules, More Tips?
Under the proposed bill in Congress, no tax benefits for tipped workers would be phased out if they earn $150,000 a year or more and the tax cuts would end in 2028. The measure would apply only to tips that are voluntary and customary, not those automatically added to bills.
“Only about 2% of the workforce is meaningfully affected by this,” Kovacs said. “It’s not a game-changer, but for those it touches, it could be a meaningful shift.”
The measure could impact some workers more than others, Richter said. Many low-income tipped workers already earn below the threshold for federal income taxes, thanks to a standard deduction between $15,000 to $30,000 in 2025. As a result, the tax exemption may provide the biggest benefits to higher-earning workers in tipping-heavy industries—such as high-end bartenders and blackjack or poker dealers.
The new legislation also would expand who receives the tax benefit. Initially the proposal was limited to waitstaff and salon workers who filed taxes as employees. Now there is a push to include independent contractors such as Uber and Instacart drivers.
“From the customer’s perspective, it doesn’t really change how or when you’re asked to tip,” Kovacs said. “But we could start to see tipping models appear in new industries—like landscaping or home repair—where employers and workers try to reclassify payments to take advantage of the exemption.”
As the provision moves through Congress, tipped workers and tippers alike are waiting to see if the impact will be felt in day-to-day transactions—whether at the bar, in a rideshare, or getting a haircut.
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