Congress recently passed a provision inside the One Big Beautiful Bill that’s already making headlines: the “No Tax on Tips” policy. The idea is straightforward—workers in certain tipped occupations can deduct their tip income from their federal taxable income.
From 2025 through 2028, individuals can deduct up to $25,000 in tips, or $50,000 if filing jointly. The IRS has also clarified that the deduction applies even if you don’t itemize your taxes. That means service staff in restaurants, salons, and hospitality—as well as workers in less obvious tipped roles, such as influencers and podcasters—could see more money stay in their paychecks.
On paper, this appears to be a populist win for workers and a morale boost for employers. But if you run a small business, here’s the truth: a policy like this can help, but it can also create new layers of uncertainty if you don’t handle it correctly.
The Opportunity and the Trap
The opportunity is obvious: employees keep more of what they earn, which can improve retention in industries already plagued by high turnover. As a business owner, you may also benefit indirectly through reduced pressure on wage increases if workers are taking home more net pay.
But the trap is just as real. Anytime Washington announces a tax “relief,” most business owners instinctively treat it as new ground to sprint across. They build plans assuming the deduction is permanent, overestimate how much it will actually impact margins, or fail to account for administrative complexity—such as how to track, verify, and report eligible tipped income through payroll.
That’s how certainty gets replaced with noise. And once noise takes over, cracks start to form in the system.
What This Means for Small Business Owners
So what should you do if you employ tipped workers? Start with perspective:
- This is temporary. The deduction only applies between 2025 and 2028. If you start making permanent commitments (such as hiring new staff, entering into long-term leases, or establishing pay structures) based on temporary policy, you’re designing for volatility, not durability.
- This isn’t the whole tax picture. The “no tax” promise only applies to federal income tax. Tips are still subject to Social Security, Medicare, and often state or local taxes. Employees may overestimate the benefit if they don’t understand that nuance—and disappointed employees are harder to manage than informed ones.
- It comes with compliance complexity. Payroll and reporting systems will need to be updated to properly classify eligible occupations and accurately capture tips. Get this wrong, and you risk IRS headaches that erase any benefit.
In short, this deduction can be a nice bonus fuel, but it is not the foundation you should be building on.
The Criticisms You Can’t Ignore
It’s also important to see the full picture of the debate. Critics from across the political spectrum point out:
- Regressive benefit. Because deductions reduce taxable income, workers in higher tax brackets may benefit more than those in lower-income brackets, who often owe little in federal taxes to begin with.
- Selective coverage. Only certain roles qualify, creating confusion and potential resentment between employees who work side by side but receive different tax treatment.
- Short-term optics. Some argue it’s more about politics than policy—designed to look worker-friendly while offering less than structural wage reform.
Whether you agree or not, as a business owner, it is essential to understand these arguments. They shape how employees will perceive the policy and how customers might respond to it.
A Certainty-Driven Playbook
Here’s where I’d urge small business owners to take a step back. Certainty doesn’t come from chasing every new deduction. It comes from designing systems that can withstand whether Congress renews the benefit in 2029 or allows it to expire.
That means:
- Don’t treat peaks as the new baseline. A temporary deduction is not recurring revenue. Use it to strengthen reserves, not to inflate fixed costs.
- Prioritize clarity with your team. Educate employees on how the deduction actually works so expectations don’t get out of control. Disappointment is a bigger retention risk than taxes.
- Integrate, don’t over-index. Fold the policy into your planning the same way you’d treat a seasonal sales bump—nice to have, but not the strategy.
- Plan beyond 2028. Build models for what happens if the deduction sunsets. Uncertainty is predictable; what matters is whether you’ve planned for it.
The philosophy here is simple: policies come and go, but systems last.
Conclusion
The “No Tax on Tips” deduction will benefit some workers, and it may give small businesses a temporary competitive edge in retaining employees. But like any tax break, it’s fleeting. The worst mistake you can make is designing your business as if it’s permanent.
The real work of building certainty is about creating a business that thrives whether the loophole exists or not. Use this moment as an opportunity to tighten systems, clarify expectations, and make decisions you can live with in any month.
Because certainty isn’t built by Washington; it’s built by you.
Sources
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