SEATTLE — For months, Tyler Heller, an assistant manager at the Central Co-op on Capitol Hill, was skeptical that Congress would eliminate federal income taxes on tips and overtime pay.

To his surprise, the new tax provisions were embedded in the tax and spending bill — a legislative package formerly known as the so-called “One Big Beautiful Bill” — that President Donald Trump signed into law last month.

“We really need it here in the now,” Heller said, referring to tax relief.

Seattle workers like Heller are cautiously optimistic about the tax code changes, which allow some to deduct tips and overtime pay from their income up to certain limits.

The tax breaks would help middle-income earners, particularly those who work a lot of overtime and in service industries. But even as workers welcome the relief, some expressed concern that it comes at too high a cost. The tax and spending bill combined tax breaks with deep cuts to safety net programs like food stamps and Medicaid, known as Apple Health in Washington.

Heller would directly benefit from the new law. He currently earns $29 per hour as his base rate and works from two to eight hours of overtime each week, which are paid at a 50% premium by law.

Because his hours fluctuate, Heller doesn’t know exactly how much money the new law will save him once he deducts overtime premiums on his tax filings next spring. But even a moderate increase in his refund would go a long way.

Heller spends $1,400 a month on his apartment in Capitol Hill, and he also owes back rent to his last landlord. Paying less in taxes would mean paying off more of his debt, he said. “I could live more comfortably.”

'It feels like a gimmick'

Across the Seattle area and beyond, people who earn tips and overtime pay and their employers are grappling with the new tax rules.

The bill Trump signed into law allows workers to deduct up to $25,000 in tips and $12,500 in overtime premium pay from their income beginning in the 2025 tax year, delivering on one of his headline campaign promises.

Eligibility for the tax break begins to phase out for single filers earning over $150,000 a year and for married couples filing jointly earning over $300,000 a year. While the provision eliminates federal income tax on tips and overtime pay, workers must still pay payroll taxes, which include Medicare and Social Security taxes. The tax breaks expire in 2028.

Some who stand to gain are nonetheless critical about the new tax and spending law, saying that it advantages middle-income workers at the expense of low-income workers.

“It feels like a gimmick,” said Spencer Lemley, a barista at the downtown location of Victrola Coffee Roasters. Lemley estimates that he will save at least $3,000 during the 2025 tax year after deducting tips from income, money that he’d like to put toward a down payment for a house one day.

But he’s also worried for his colleagues in the service industry who don’t have access to health insurance through work and instead rely on publicly funded Medicaid. The same bill that removed income taxes on tips also imposed new Medicaid eligibility rules and requirements, which are projected to put hundreds of thousands in Washington at risk of losing coverage, according to the state health agency.

Eliminating taxes on tips and overtime pay is expected to cost about $121 billion in tax revenue over the next decade, according to a congressional analysis. That’s based on the assumption that the tax break isn’t extended beyond 2028.

'Tips — we live off that'

It’s difficult to estimate just how many people in Washington will ultimately benefit from the new tax breaks. While most workers are eligible for overtime, those who actually earn it vary by industry, employer and worker preference.

The picture for tipped workers is a bit clearer. In Washington, about 220,000 workers earn tips, according to an analysis of 2024 data by the state’s Employment Security Department. That represents slightly over 6% of the state’s covered workforce.

That's just an estimate, said Anneliese Vance-Sherman, chief labor economist for the state Employment Security Department. The number of people who earn tips has expanded in recent years with the widespread adoption of electronic payment systems. Vance-Sherman recalled being prompted for a tip after buying a pair of shoes recently.

For people who work in the taxi, ride hail, gambling, hospitality and personal care industries, tips make up a significant proportion of total income, and deducting them will make a big difference in their after-tax earnings.

“It’s about time,” said Yvey Valcin, hair stylist and owner of Yvey Salon on Capitol Hill. To Valcin, tips are a discretionary and voluntary token of appreciation that never should have been taxed in the first place. They’re more akin to gifts than income in his view.

He estimates that he earned about $25,000 in tips last year. Being able to deduct that amount in the 2025 tax year would give him more breathing room and widen the margins for his small business. “Tips — we live off that.”

The tax break on tips and overtime pay will benefit higher earners more than lower earners. That’s because low earners typically don’t have significant tax obligations in the first place, said John Ricco, associate director of policy analysis at the Budget Lab at Yale University.

About one-third of tipped workers in the U.S. don’t owe any federal income taxes because of how little they make and “would not actually benefit whatsoever from this deduction,” he said, based on a Budget Lab analysis.

In Seattle, restaurant workers are worried that the law won’t benefit everyone in the industry equally. Increasingly, restaurants in the city are adopting mandatory service charges in lieu of tips. In addition, most restaurants have mandatory service charges for large groups of diners.

Under the new tax law, any income from those fees would not be deductible, meaning those restaurant workers won’t be able to take advantage of the new tax break, despite doing the same job and earning around the same amount of money as their tipped peers.

Andrew Zhao and Jenna Wade both work at restaurants located in Pike Place Market, with income that fluctuates around $5,000 a month depending on the season. Both estimate that less than half of their income comes from wages themselves.

Wade works at Radiator Whiskey, where workers receive tips; Zhao works at Sushi Kashiba, where the restaurant has a mandatory 20% service surcharge and distributes it to workers instead, though customers can and do leave additional tips.

As written, the law would advantage Wade far more than Zhao.

Zhao has worked at least part time in the service industry since they were 19. Restaurant work can be volatile, heavily dependent on tourism and weather, Zhao said, and income typically plummets in the winter compared with the summer. Paying less income tax on tips would help them set aside savings to manage those dips. “Being in this sort of industry, it helps a lot to be able to have money for a rainy day.”

Wade feels differently. Despite the fact that she would benefit from it, Wade finds the tax break unfair. She doesn’t see why some people should get an income deduction on their taxes and not others. “I think it’s bad policy,” she said.

Experts say that the coming months will probably see labor market shifts in response to the new tax law.

Restaurants might abandon service-fee business models for tipping again. Workers deciding between warehouse jobs and service work might opt for the latter, incentivized by the tax break. Industries where tipping is rarer might begin to push the practice more aggressively.

“It's not crazy to believe that tipping might be introduced in jobs that currently don't have a lot of tipping, or have no tipping in general,” said Ricco, of the Yale Budget Lab.

But that doesn’t mean anyone can just claim their income as tips going forward.

To prevent abuse, Congress instructed the Department of the Treasury to publish a list of jobs that qualify for the tax break before early October. Until then, plenty of workers and employers alike might have to wait and see what the new tax breaks mean for them.

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