by Daniel Brouse
July 3, 2025
Under the proposed “New Big Beautiful Bill,” both tip income and overtime pay would become entirely tax-exempt, a policy pitched as a benefit for service workers and middle-class earners. However, the structure of the bill opens the door to one of the largest tax avoidance loopholes in U.S. history, particularly benefiting the wealthy and those able to manipulate their income classifications.
The bill would allow individuals to reclassify up to 100% of their income as “tips” or “overtime,” making it entirely untaxed. In theory, a restaurant server could keep more of their hard-earned money. In practice, those with flexible income streams—consultants, influencers, LLC owners, gig workers, and billionaires—could label their payments, bonuses, or “advisory fees” as “tips” or “overtime.” This would allow them to pay zero in federal income taxes while continuing to benefit from taxpayer-funded infrastructure, defense, education, and healthcare systems.
Unlike traditional wage earners on standard payroll systems, those with the means and legal resources to restructure their income streams would avoid taxation altogether, widening inequality and undermining the tax base that funds Medicare, Social Security, public education, and essential services.
Additionally, labeling “overtime” as tax-exempt is particularly misleading. True hourly wage workers rarely control how much overtime they receive, while salaried or contract workers with control over project deadlines and payment structures could claim artificially extended “overtime” hours, effectively shielding high earnings from taxation. It becomes another tool for high-income earners and corporations to dodge taxes under the guise of helping working families.
This policy would exacerbate deficits and undermine U.S. fiscal stability, all while being marketed as a pro-worker tax cut. It incentivizes underreporting, increases fraud risk, and erodes trust in the tax system, destabilizing revenue streams that are already strained by rising deficits and unsustainable fiscal policy.
In short, the “New Big Beautiful Bill” is not merely a harmless worker-friendly tax cut. It is a stealth tax shelter for the wealthy, disguised under the simple labels of “untaxed tips” and “untaxed overtime.” If enacted, it could become one of the most regressive tax changes in modern history, funneling wealth upward while placing a greater burden on those who cannot reclassify their wages to avoid taxes.
UPDATE: JULY 4, 2025
Sources still can’t confirm the exact mechanics, but it appears the changes won’t take effect until late 2026 and will expire in 2028, so the long-term impact may be limited. Here’s what we believe we know so far:
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Tax on Tips: Allows workers to deduct a portion of tip income from federal taxes.
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Deduction Limit (Tips): Capped at $25,000 per year.
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Phase-Out (Tips): Phased out for individuals earning over $150,000 ($300,000 for joint filers).
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Exclusions (Tips): Notably, “the performing arts” are reportedly excluded from claiming the tip deduction. As one source notes: “As was the case in the House bill, the Senate bill provides that workers in certain specified businesses are not eligible for the tip deduction.” This is one of the most backwards tax provisions I’ve seen—when most people think of tipped workers, musicians and performers are among the first that come to mind, yet they are apparently excluded from benefiting under this bill.
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Tax on Overtime Pay: Provides a temporary tax deduction for overtime earnings.
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Deduction Limit (Overtime): Capped at $12,500 per year ($25,000 for joint filers).
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Phase-Out (Overtime): Same phase-out thresholds as the tip deduction.
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Duration: These provisions expire at the end of 2028.
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Cost: The Congressional Budget Office estimates the bill would increase the deficit by nearly $3.3 trillion over 10 years.
While marketed as relief for workers, these deductions are temporary, skew toward higher earners, exclude some of the workers who rely on tips the most, and add significantly to the deficit without addressing long-term fiscal sustainability.
ADDENDUM: The “No Tax on Tips” Gimmick: A Con Disguised as Help for Workers
People celebrating this “no tax on tips” gimmick don’t realize how it actually works—and why it will cost most workers money rather than save it.
Under the new law, the “no tax on tips” provision only applies if you itemize your deductions instead of taking the standard deduction, which is currently over $15,000 for individuals and more for joint filers. Most low-wage workers don’t itemize because they don’t have enough deductions to make it worthwhile. If they chose to itemize just to claim untaxed tips, they would lose the value of the standard deduction, which would often wipe out any potential savings or even leave them paying more in taxes.
There’s also a $25,000 cap on the untaxed tip deduction, making it useless for higher earners who would see their deduction phased out while also losing the standard deduction. Meanwhile, billionaires, gig workers, and others who can restructure their income streams could still exploit this loophole by reclassifying payments as “tips.” They could claim advisory fees, bonuses, or “consulting payments” as tips, reducing their taxable income to zero while still leveraging the infrastructure, programs, and services funded by taxpayers.
In reality, the “no tax on tips” provision is a clever marketing tool designed to mislead voters into thinking it helps workers while draining revenue from Medicare, Social Security, education, and infrastructure—programs these same workers rely on. At the same time, it creates a backdoor tax shelter for those who know how to manipulate the system, exacerbating inequality and deepening the deficit.
If lawmakers truly wanted to help workers, they could increase the minimum wage, strengthen wage theft enforcement, and expand the Earned Income Tax Credit—actions that would put real money into workers’ pockets without jeopardizing their access to essential services. Instead, the “no tax on tips” gimmick is another bait-and-switch policy, disguised as populism while serving wealthier interests in the background.
It’s not a gift to workers. It’s a con—and voters deserve to know the truth before it’s too late.