TIP Improvement Act of 2026

Bill Number

H.R. 7577

Origin Chamber

House

Congress

119th Congress, Session 2

Policy Area

Taxation

Status

Introduced

Latest Action

2026-02-13: Referred to the Committee on Ways and Means, and in addition to the Committee on Education and Workforce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

Last Updated

2026-03-11T23:01:39Z

AI-Generated Summary

Purpose

The Tipped Income Protection and Improvement Act of 2026 (H.R. 7577) aims to protect tipped workers by eliminating the tip credit under federal minimum wage law, ensuring they receive the full federal minimum wage from their employers, and by enhancing tax benefits for tips through the Internal Revenue Code. This legislation seeks to improve income stability for workers in tip-reliant jobs while addressing potential misuse of tips and expanding tax deductions to reduce the tax burden on such income.

Key Provisions

• Minimum Wage for Tipped Employees (Amendments to Fair Labor Standards Act - FLSA):
• Requires employers to pay tipped employees the full federal minimum wage as set in FLSA Section 6(a)(1), without using tips to offset any portion of that wage (previously, employers could claim a "tip credit" to pay a lower base wage).
• Allows tipped employees to retain all their tips, but permits tip pooling (sharing tips) among employees who regularly receive tips.
• Increases penalties for employers who unlawfully keep or misuse tips, removing references to tip credits in penalty calculations to focus solely on the value of misused tips.

• Qualified Tip Deduction (Amendments to Internal Revenue Code - IRC):
• Doubles the annual deduction limit for qualified tips to $50,000 for joint tax returns (from $25,000 for single filers), making it available to more households.
• Adds safeguards against waste, fraud, and abuse by disqualifying tips paid by related parties (e.g., family members under IRC Section 267(b)) or if the worker owns a stake in the employing business.
• Requires taxpayers to include their taxpayer identification number (TIN) on returns to claim the deduction, ensuring proper verification.
• Includes automatic gratuities (mandatory or suggested tips under employer policy) as qualified tips for workers in hospitality, food and beverage service, or cosmetology, provided they meet other criteria and are pooled only among tipped employees if required by state or local law.
• Makes the deduction permanent (previously temporary) and applies changes to taxable years beginning after December 31, 2025.

Significant Changes to Existing Law

• FLSA Changes: Ends the federal tip credit system, which allowed employers in tipped occupations (like servers or bartenders) to pay a base wage as low as $2.13 per hour plus tips, as long as tips brought total earnings to at least the federal minimum wage of $7.25 per hour. Now, employers must pay the full minimum wage upfront, with tips as additional income. Penalties under FLSA Section 16 are revised to directly target unlawful retention of tips without crediting prior offsets.
• IRC Changes: Expands the qualified tip deduction (under Section 224) by increasing limits, adding anti-abuse rules, requiring TINs for claims, and treating certain automatic gratuities as deductible tips. It removes the sunset provision, making the deduction ongoing rather than expiring, and reorganizes subsections for clarity.

Potential Impacts

• On Government Agencies: The Department of Labor (DOL) will enforce higher base wages and stricter tip retention rules, potentially increasing oversight and investigations in service industries. The Internal Revenue Service (IRS) will process more deduction claims with enhanced verification, which could reduce tax revenue short-term but improve compliance and reduce fraud long-term.
• On Citizens: Tipped workers (e.g., waitstaff, delivery drivers) gain guaranteed minimum wage paychecks, reducing income volatility and reliance on customer tips, but may face changes in tip pooling. Taxpayers in eligible professions benefit from larger, permanent deductions on tip income, lowering their federal tax liability. Employers may see higher labor costs, potentially leading to price increases in restaurants or services.
• On International Relations: Minimal direct impact, though it could indirectly affect U.S. tourism or hospitality sectors that employ foreign workers on visas, by raising wage standards.

Main Stakeholders Affected

• Tipped Workers: Primary beneficiaries, including servers, bartenders, hotel staff, cosmetologists, and others in tip-based roles, who gain wage protections and tax relief.
• Employers: Particularly in hospitality, food service, and beauty industries, who must adjust payroll to cover full minimum wages and comply with new tip and tax rules, potentially increasing operational costs.
• Government Entities: DOL for wage enforcement; IRS for tax deduction administration; and state labor departments, as this sets a federal floor that may influence state laws.
• Consumers: Indirectly affected through possible higher prices for services to offset employer costs.

Notable Legal, Constitutional, or Political Implications

• Legal Implications: Strengthens worker protections under FLSA by closing loopholes in tip handling, making it easier for employees to pursue violations through lawsuits or DOL actions. The IRC changes enhance tax equity for low-wage earners but introduce stricter eligibility (e.g., TIN and ownership rules), which could lead to more audits or disputes over what qualifies as a "tip."
• Constitutional Implications: Aligns with the Fair Labor Standards Act's foundation under the Commerce Clause, promoting uniform labor standards without apparent conflicts; no direct challenges to free speech, due process, or equal protection are evident.
• Political Implications: Represents a shift toward stronger labor rights for service workers, potentially appealing to progressive policies on income inequality, but may face opposition from business groups concerned about costs. As a bipartisan committee referral (Ways and Means and Education and Workforce), it could influence broader debates on minimum wage hikes and tax reforms for gig or service economies.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Rep. Horsford, Steven [D-NV-4]

Recent Actions

• 2026-02-13: Referred to the Committee on Ways and Means, and in addition to the Committee on Education and Workforce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
• 2026-02-13: Referred to the Committee on Ways and Means, and in addition to the Committee on Education and Workforce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
• 2026-02-13: Introduced in House
• 2026-02-13: Introduced in House

Bill Versions

• Tipped Income Protection and Improvement Act of 2026 — issued 2026-02-13 — PDF (5 pages)