What the No Tax on Tips Act Means for Workers and Businesses
In a rare show of bipartisan unity, the Senate has unanimously passed the No Tax on Tips Act, a sweeping proposal that would overhaul how tipped income is taxed in the U.S. If signed into law, the bill would exempt up to $25,000 in tips from federal income taxes.
The bill, a signature campaign promise of President Donald Trump, now moves to the Republican-controlled House, where it enjoys broad support.
'We are one step closer to eliminating taxes on tipped wages for hardworking Americans,' Senate Minority Leader Chuck Schumer said in a statement following the bill's Senate passage. 'Working Americans— from servers, to bartenders, delivery drivers, and everything in between— work hard for every dollar they earn and are the ones who deserve tax relief, not the ultra-rich.'
The effort to eliminate taxes on tips quickly gained traction during the 2024 campaign, with polling indicating majority support for the proposal across the country, though Americans are mixed on the potential outcomes of the policy. The idea has also drawn criticism from a number of economists and labor advocates.
Here's what the bill would mean for workers and businesses.
The No Tax on Tips Act would revise the IRS Code to eliminate the income tax on tips.
Employees who 'traditionally and customarily received tips on or before December 31, 2023,' would therefore be exempt from paying taxes for up to $25,000 earned tip income. That includes waiters, bartenders, and delivery drivers. Beauty service workers—such as barbers, estheticians, and nail technicians—would also benefit, though the full list of eligible occupations would only be listed by the U.S. Treasury Secretary 90 days after the bill's passage.
To qualify for the tax deduction, employees must have earned less than $160,000 for the 2024-2025 tax year. Should the bill become law, this income qualification will be adjusted for inflation.
The exemption would impact only a small fraction of the country's workforce. The Yale Budget Lab estimates that some 4 million people worked in tipped occupations in the U.S. in 2023, representing about 2.5% of all U.S. workers. Others, such as the Economic Policy Institute (EPI), estimate tipped workers to make up a slightly higher percentage of about 5%
And despite the proposal's broad appeal, economists say that curtailing taxes on tips may harm workers in the service industry. Already, 37% percent of tipped workers do not pay federal income tax because they earn so little. Experts fear that the new policy would incentivize employers to keep base wages stagnant. The tax change may also affect their eligibility for other programs, such as the child tax credit and earned income tax credit, or reduce their contributions to Social Security.
The No Tax on Tips Act could further impact the nature of tipping culture in the U.S. Experts warn businesses could potentially encourage tipping requests, or make them mandatory, in order to pay their workers less. Research shows that 72% of Americans already feel they are being asked to tip workers more frequently, per a Pew Research Center report.
The No Tax on Tips Act also expands the business tax credit for the portion of payroll taxes that businesses might previously have paid on certain employee tips.
The National Restaurant Association voiced its support for the bill in January, praising the potential benefits for workers and saying they could have a positive impact for employers as well.
'Eliminating taxes on tips would put cash back in the pocket of a significant number of workers in the restaurant and foodservice industry and could help restaurant operators recruit industry workforce,' the organization said in a statement. 'Tax policy plays a major role in the success of the restaurant industry, so we'll continue to work with Congress on this and other common-sense tax policy that will stimulate investments and improvements in restaurants of all sizes and help operators make greater investments in their workforce and communities.'
Contact us at letters@time.com.
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