Senate Passes A 'No Tax On Tips' Bill—Here's How It Differs From House Version

Forbes

21-05-2025

The Senate's version of the bill would cap the deduction at $25,000.
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In a surprise move, the Senate passed the No Tax on Tips Act. The vote was unanimous.
The bill was originally introduced by Sen. Ted Cruz (R-Texas) to little fanfare. However, on May 20, Sen. Jacky Rosen (D-Nev.), one of seven cosponsors of the bipartisan bill, brought it to the Senate floor, where it passed by unanimous consent. Unanimous consent is a procedural tool that is exactly what it sounds like—it requires the unanimous agreement of all Senators. You don't typically see it used in tax bills, as it's generally used for noncontroversial resolutions and simple requests, neither of which typically falls into the tax policy basket.
Rosen noted that no tax on tips was a campaign pledge made by President Donald Trump. 'And I am not afraid to embrace a good idea wherever it comes from,' she said on the Senate floor, noting that Nevada has more tipped workers per capita than any other state.
The bill would allow a federal income tax deduction for workers who typically receive tips as part of their compensation—think hairdressers and food service employees. The income must be reported for tax purposes and would still be subject to payroll taxes (more on that in a moment).
Highly compensated employees (those who make over $160,000 in 2025) would be excluded. And to curb abuse, Treasury is directed to craft regulations or other guidance to 'prevent reclassification of income as qualified tips... to prevent abuse of the deduction.'
It's important to note that this is a federal income tax deduction, not an exclusion. That means that tips would still be reportable—and taxable at the state and local level. It also means that tips would remain subject to payroll taxes, including Social Security and Medicare, for employees.
The bill now heads to the U.S. House of Representatives as a standalone piece of legislation. It largely mirrors the 'no tax on tips' text found in the 'big, beautiful bill' moving forward in the House. So why carve it out?
Politics. Rosen told her colleagues, 'The problem is that the House Republicans have included a version of the No Tax on Tips Act in their bigger budget bill—a bill that cuts Medicaid, SNAP, and other programs families rely on, to give more tax breaks for billionaires and the ultrawealthy. So we shouldn't be forcing working families to choose between keeping their healthcare or keeping their tips, which is why we want this bipartisan bill to pass on its own—on its own—not part of a harmful, extreme budget bill.'
There are some differences between the two versions. As proposed in the House, the deduction would only be for tax years 2025 through 2028—for individuals who work in what are considered 'traditionally and customarily tipped industries.' (According to the proposal, that would only include industries that accepted tips on or before December 31, 2024—Treasury is directed to make a list of those that qualify.) The Senate version of the bill, as passed, is effective for tax years beginning in 2025—there's no proposed end date.
The Senate bill caps the deduction at $25,000, while the House version has no cap. The House version allows a full deduction of 'an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual.'
A final—and important distinction—is that the Senate bill does not appear to apply to self-employed persons. While the House version includes language specifically including tips received in the course of a trade or business in the definition of qualified tips, that section is noticeably absent from the Senate version of the bill.
The likely reason for those differences? Cost. The House version of the bill is cheaper, something that fiscal conservatives in the House and Senate will be mindful of as conversations about the growing federal deficit continue.
Both versions of the bill would allow employers a break via a tip credit. The deduction, which has been in place since 1993 for restaurants, is known as the 45B credit and allows for a rebate on the entire employer side of payroll taxes on tips. The instructions for claiming the 45B credit made clear it covers tips to employers involved in "providing, delivering, or serving food or beverages for consumption." The result is that tips provided elsewhere—like in salons—are subject to payroll taxes for both employees and employers, even though not a penny goes to the salon.
The Senate and House bills propose to change that by extending the benefit to the beauty industry. Under the amendment, section 45B would be amended to include barbers and hair care, nail care, esthetics, and body and spa treatments.
Confused about the employer versus employee sides of payroll taxes? For wage earners, Social Security and Medicare taxes are called FICA (Federal Insurance Contributions Act) and are taken out of your paycheck. Taxes on self-employment income are sometimes called SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.
If you're employed, you pay Social Security tax at a rate of 6.2% as the employee, and your employer pays the same tax rate on your behalf. If you're self-employed, you are responsible for both parts.
Social Security taxes are subject to a wage cap. That means you pay Social Security taxes on your earnings until you hit the magic number. After that, your wages are no longer subject to Social Security taxes. For 2025, the magic number is $176,100. That means that whether you make $1,000 or $100,000, you will pay Social Security taxes on your income. But if you earn $176,101? You'll pay Social Security taxes on the first $176,100, but not on the extra dollar. And if you earn $1,176,100? Same result: you'll pay Social Security taxes on $176,100, but not on the extra million.
In contrast, all wages are subject to Medicare taxes. If you're employed, you pay Medicare tax of 1.45% as the employee, and your employer kicks in tax at the same rate. As before, if you're self-employed, you'll pay both portions, for a total tax rate of 2.9%.
High-income taxpayers are also subject to an additional Medicare tax of 0.9% tacked onto wages that exceed $200,000 for single filers—those thresholds are $125,000 for married taxpayers filing separately and $250,000 for married taxpayers filing jointly.
If you're a wage earner, your employer collects your Social Security and Medicare payments and remits both their portion and your share to the government. Self-employed persons pay the IRS directly. Retaining payroll taxes on tips and overtime may mean a bigger bite at tax time, but there is an upside: No matter who pays, these taxes are credited toward your retirement benefits.
The House version of the bill is still working its way to the floor. To become law, the language in the two versions must match exactly. Considering the cost considerations, that could prove to be a challenge.