On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (OBBB), one of the most extensive tax packages enacted in recent years.
This sweeping legislation not only makes permanent several major tax reductions originally set to expire at the end of 2025 but also introduces a variety of new benefits aimed at supporting American workers, families, and small businesses.
By securing these long-standing tax cuts, the OBBB ensures that individuals and companies across the country will continue to operate under a lower and more predictable tax structure for the foreseeable future.
A centerpiece of the new law is the expansion of taxpayer-focused deductions, including tax-free overtime pay and an enhanced additional deduction for senior citizens.
However, the provision that has drawn the most national attention is the inclusion of the No Tax on Tips Act, a measure specifically designed to support the millions of Americans who depend on tips as a primary source of income.
According to projections from the Congressional Budget Office (CBO), the full array of tax changes within OBBB is expected to increase the federal deficit by approximately $3.4 trillion over the next decade, reflecting the scale and long-term financial impact of these tax reforms.
The passage of the OBBB has been especially well received by workers in the service and hospitality industries, including restaurant staff, bartenders, hotel employees, delivery drivers, rideshare workers, salon professionals, and many others whose earnings rely heavily on gratuities.
Supporters of the law argue that these workers—many of whom live paycheck to paycheck and face unpredictable earnings—deserve targeted tax relief that directly increases their take-home pay.
While the tax-free overtime and tip provisions function as deductions rather than full tax eliminations, they nevertheless have the potential to raise net income for millions of employees whose livelihoods depend on long hours and customer-based compensation.
Senator Ted Cruz of Texas, one of the lead sponsors of the bill, emphasized the equity and fairness goals behind the legislation.
“This is about fairness,” he said. “These workers are putting in long hours and living paycheck to paycheck.
They deserve to keep more of what they earn.” His co-sponsor, Senator Jacky Rosen of Nevada, highlighted the significance of the bill for states whose economies are deeply dependent on tourism and hospitality.
“Service workers are the backbone of the economy,” she noted. “This bill offers them the respect and support they deserve.”
The No Tax on Tips Act itself represents a significant amendment to the federal tax code.
Under pre-existing law, all tips—whether paid in cash, added to a credit card bill, or distributed through tip-sharing systems—must be reported as taxable income, and employers are required to withhold federal income taxes accordingly.
With the new provision under OBBB, tips would still need to be reported, but they would no longer be subject to federal income tax, giving tipped employees a meaningful boost in their net income.
Importantly, the law draws distinctions between different types of payments.
Only voluntary tips—those freely given by customers—qualify for the tax exemption.
Automatic service charges, such as mandatory gratuities added to large restaurant parties or hotel bills, do not count as tips and therefore remain fully taxable.
Additionally, the benefit does not apply to individuals in Specified Service Trades or Businesses (SSTBs), such as attorneys, consultants, financial advisors, entertainers, and other professionals whose income is primarily derived from skill, reputation, or specialized services rather than direct tipping from customers.
This restriction ensures that the tax break is targeted to workers who genuinely rely on gratuities as part of their daily earnings.
Supporters of the new tax structure argue that these provisions will ease administrative and financial burdens for small businesses, many of which struggle with tip reporting requirements and fluctuating payroll obligations.
By reducing the tax impact on tipped income, the law is expected to improve financial stability for both businesses and employees in industries where compensation varies widely from week to week.
For lower- and middle-income workers—especially those living in high-cost urban areas—the ability to keep more of their earnings could result in a significant improvement in financial security, budgeting capacity, and monthly cash flow.
Taken together, the changes introduced through the One Big Beautiful Bill Act represent a broad national effort to strengthen the American workforce, modernize tax policy, and provide targeted relief to workers who form the foundation of the country’s service economy.
While debates will continue regarding the long-term fiscal impact of the legislation, the immediate effects are clear:
millions of Americans who rely on tips, overtime, and variable earnings stand to benefit from a more supportive and worker-focused tax environment.
On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (OBBB), one of the most extensive tax packages enacted in recent years.
This sweeping legislation not only makes permanent several major tax reductions originally set to expire at the end of 2025 but also introduces a variety of new benefits aimed at supporting American workers, families, and small businesses.
By securing these long-standing tax cuts, the OBBB ensures that individuals and companies across the country will continue to operate under a lower and more predictable tax structure for the foreseeable future.
A centerpiece of the new law is the expansion of taxpayer-focused deductions, including tax-free overtime pay and an enhanced additional deduction for senior citizens.
However, the provision that has drawn the most national attention is the inclusion of the No Tax on Tips Act, a measure specifically designed to support the millions of Americans who depend on tips as a primary source of income.
According to projections from the Congressional Budget Office (CBO), the full array of tax changes within OBBB is expected to increase the federal deficit by approximately $3.4 trillion over the next decade, reflecting the scale and long-term financial impact of these tax reforms.
The passage of the OBBB has been especially well received by workers in the service and hospitality industries, including restaurant staff, bartenders, hotel employees, delivery drivers, rideshare workers, salon professionals, and many others whose earnings rely heavily on gratuities.
Supporters of the law argue that these workers—many of whom live paycheck to paycheck and face unpredictable earnings—deserve targeted tax relief that directly increases their take-home pay.
While the tax-free overtime and tip provisions function as deductions rather than full tax eliminations, they nevertheless have the potential to raise net income for millions of employees whose livelihoods depend on long hours and customer-based compensation.
Senator Ted Cruz of Texas, one of the lead sponsors of the bill, emphasized the equity and fairness goals behind the legislation.
“This is about fairness,” he said. “These workers are putting in long hours and living paycheck to paycheck.
They deserve to keep more of what they earn.” His co-sponsor, Senator Jacky Rosen of Nevada, highlighted the significance of the bill for states whose economies are deeply dependent on tourism and hospitality.
“Service workers are the backbone of the economy,” she noted. “This bill offers them the respect and support they deserve.”
The No Tax on Tips Act itself represents a significant amendment to the federal tax code.
Under pre-existing law, all tips—whether paid in cash, added to a credit card bill, or distributed through tip-sharing systems—must be reported as taxable income, and employers are required to withhold federal income taxes accordingly.
With the new provision under OBBB, tips would still need to be reported, but they would no longer be subject to federal income tax, giving tipped employees a meaningful boost in their net income.
Importantly, the law draws distinctions between different types of payments.
Only voluntary tips—those freely given by customers—qualify for the tax exemption.
Automatic service charges, such as mandatory gratuities added to large restaurant parties or hotel bills, do not count as tips and therefore remain fully taxable.
Additionally, the benefit does not apply to individuals in Specified Service Trades or Businesses (SSTBs), such as attorneys, consultants, financial advisors, entertainers, and other professionals whose income is primarily derived from skill, reputation, or specialized services rather than direct tipping from customers.
This restriction ensures that the tax break is targeted to workers who genuinely rely on gratuities as part of their daily earnings.
Supporters of the new tax structure argue that these provisions will ease administrative and financial burdens for small businesses, many of which struggle with tip reporting requirements and fluctuating payroll obligations.
By reducing the tax impact on tipped income, the law is expected to improve financial stability for both businesses and employees in industries where compensation varies widely from week to week.
For lower- and middle-income workers—especially those living in high-cost urban areas—the ability to keep more of their earnings could result in a significant improvement in financial security, budgeting capacity, and monthly cash flow.
Taken together, the changes introduced through the One Big Beautiful Bill Act represent a broad national effort to strengthen the American workforce, modernize tax policy, and provide targeted relief to workers who form the foundation of the country’s service economy.
While debates will continue regarding the long-term fiscal impact of the legislation, the immediate effects are clear:
millions of Americans who rely on tips, overtime, and variable earnings stand to benefit from a more supportive and worker-focused tax environment.
