Tips Just Became Even More Valuable for US Hospitality Workers
On July 2, 2025, the US Senate approved the One Big Beautiful Bill Act, including a groundbreaking provision: tips earned by workers in traditionally tipped occupations will no longer be taxed as federal income, up to $25,000 per year.
The big news: No federal income tax on tips – at least for now
For bartenders, servers, baristas, and countless tipped workers across the US, this change could have a real, tangible impact on take-home pay.
How does it work?
Here are the key points at a glance:
✅ No federal income tax on tips up to $25,000/year
✅ Applies to employees (W-2) and contractors (1099) in tipped occupations
✅ Available from 2025 through 2028
✅ Phases out for individuals earning over $150,000 ($300,000 joint)
✅ State and local taxes still apply
✅ The top 20% of tipped workers stand to gain the most, with an average tax cut of nearly $5,800 according to the Economic Policy Institute.
Why does this matter for restaurants and guests?
Tips are a core part of compensation.
For many hospitality workers, tips account for 40-70% of income. Making them tax-exempt at the federal level significantly increases net earnings – without raising costs for employers.
Financial stress is one of the top drivers of turnover in hospitality. Extra take-home pay is a powerful retention tool.
Guests may tip more generously.
Knowing that tips aren’t taxed federally could encourage diners to leave higher tips, amplifying the effect.
How sunday fits in: +10% tips on average
At sunday, we’ve seen firsthand the impact that streamlined tipping flows have on teams. Restaurants using sunday’s digital checkout experience see tips increase by 10% on average in the US.
sunday has helped our team members see better tips and be more productive. Joe, VP at Chickie’s & Pete’s
Why?
Ease: Guests can tip in two taps, without waits for terminals.
Design: Our tipping flow is optimised for generosity, while remaining guest-friendly.
Timing: The ask comes at the perfect moment – right when the guest is feeling satisfied.
Combine this +10% tip boost with a new federal tax exemption, and you’re looking at a substantial improvement in staff take-home pay.
🚀 What should operators do now?
Communicate clearly with staff about this change and its benefits.
Ensure your tipping systems are optimised to make tipping easy, fast, and intuitive.
Consider digital solutions like sunday, proven to increase tip amounts while improving table turn times and guest satisfaction.
Final thoughts
Policy changes come and go, but creating a culture and system that drives better tips is always in your control. Tools like sunday amplify that, making every payment an opportunity to support the team who makes your guest experience exceptional.
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