No Tax on Tips: When It Starts, Who Qualifies and More
After both parties in Washington embraced ending federal income tax on tips during the last election cycle, a bill that would do just that made it through the Senate Tuesday.
The big story in Congress right now is that Republican lawmakers in the House are negotiating a large-scale tax bill that would extend 2017 tax cuts and, among other things, end taxes on tips and overtime pay. But while those discussions were playing out on Tuesday, Sen. Jacky Rosen, D-Nev., moved to pass a stand-alone "no tax on tips" bill through a process that requires unanimous consent — meaning no floor opposition. It worked.
Here's everything you need to know about the No Tax on Tips Act, as passed by the Senate.
No tax on tips 2025: When will it start?
The bipartisan support is notable, but this bill still has hurdles to clear before it becomes law. To be enacted, it would first need approval in the House — possibly as part of the "One, Big, Beautiful" tax bill the GOP is arguing over. If passed in both chambers, the act would then need the signature of President Donald Trump. That would be expected, as Trump campaigned on a "no tax on tips" promise to service industry workers last fall.
Assuming that happens and the legislation remains in roughly its current form, the change would deliver immediate tax relief through a 100% deduction on qualifying tips. The deduction would be available for tax years after Dec. 31, 2024, including the current tax year (2025).
The deduction would be capped at $25,000 per year. It would only apply to income tax, meaning workers would continue paying payroll tax on tips.
What occupations would qualify for the no tax on tips deduction?
The bill is written to include most workers who currently receive tips, and it includes some language meant to prevent tax dodging in industries where tips haven't traditionally been given.
Workers would be eligible to deduct tipped income in "an occupation which traditionally and customarily received tips on or before December 31, 2023," according to the bill text. The secretary of the Treasury would be responsible for publishing a list of these occupations within 90 days of enactment of the bill.
Food and beverage industry workers, including delivery people, would be included. The bill also specifically mentions tipped beauty service occupations, including barbering and those who handle hair care, nail care, esthetics, and body and spa treatments.
To claim the deduction, an individual's compensation must be less than $160,000 in 2025 — a cutoff that would be indexed to inflation.
Do credit card tips count?
The Senate bill lets workers deduct 100% of qualifying tipped income, including tips that come from cash, debit and credit card transactions.
Lawmakers say the bill is primarily aimed at putting money back in workers' pockets, but it would also address longstanding complaints around uneven taxation of cash versus credit card tips.
Even though tips are supposed to be taxed under current law, some workers who receive tips in cold, hard cash have evaded taxation by simply not reporting the income to the IRS. This underreporting was more common when American society as a whole relied more on cash. Even now, though, it's still prevalent — and creates discrepancies in how much people actually pay in taxes depending on whether they take home cash tips at the end of their shifts.
According to a summary of the bill, the deduction would be limited to tips that are reported by employees to their employers. This reporting ensures that payroll taxes are withheld.
Will the "no tax on tips" policy work?
Republican Sen. Ted Cruz of Texas, who introduced the bill, celebrated its passage in a statement Tuesday, saying, "This legislation will have a lasting impact on millions of Americans by protecting the hard-earned dollars of blue-collar workers, the very people who are living paycheck to paycheck."
The bill does have some critics outside of Congress, however. They point out that the bill doesn't help all tipped workers, 37% of whom don't earn enough to owe federal income tax, according to the Brookings Institution.
Abir Mandal, a senior policy analyst at the Tax Foundation, wrote in an April blog post he the no tax on tips change on the grounds that it "undermines economic fairness" because non-tipped workers wouldn't get any tax break. Other concerns include the possibility that Americans would start tipping less if the deduction goes into effect.
Despite these concerns, the bill is broadly popular given the widespread sense that various groups of Americans need tax relief to cope with the high cost of living.
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