No Tax on Tips Act

Bill Number

S. 129

Origin Chamber

Senate

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Passed Senate

Latest Action

2025-05-26: Held at the desk.

Last Updated

2025-05-27T08:05:17Z

AI-Generated Summary

Purpose

The "No Tax on Tips Act" (S. 129) aims to provide tax relief to workers who receive tips by allowing them to deduct qualified tips from their taxable income, effectively eliminating federal income tax on those tips up to a certain limit. It also extends a related tax credit for employers to cover Social Security taxes on tips in additional service industries.

Key Provisions

• Deduction for Qualified Tips:
• Individuals can deduct up to $25,000 in qualified tips per tax year from their taxable income.
• Qualified tips are cash tips received in occupations that traditionally and customarily involved tipping as of December 31, 2023, and must be reported to the employer under existing tax rules (section 6053(a) of the Internal Revenue Code).
• Excludes tips received by highly compensated employees (those earning more than the threshold under section 414(q) of the Code, which relates to retirement plan compensation limits, currently around $150,000 annually).
• The U.S. Secretary of the Treasury must publish a list of qualifying occupations within 90 days of enactment.
• Accessibility of Deduction:
• Available to all individual taxpayers, including those who do not itemize deductions (via amendment to section 63(b)).
• Not treated as a miscellaneous itemized deduction (amendment to section 67(b)) and exempt from overall deduction limits (amendment to section 68(c)), making it easier to claim.
• Withholding Adjustments:
• The Treasury Secretary must update income tax withholding tables and procedures to account for the deduction, reducing taxes withheld from paychecks.
• Extension of Employer Tip Credit:
• Expands the existing credit under section 45B (which offsets a portion of employer-paid Social Security taxes on tips) to beauty service establishments.
• Beauty services include barbering and hair care, nail care, esthetics (skin care), and body and spa treatments.
• Tips qualify if tipping is customary in these services.
• Adjusts the credit calculation to use current minimum wage rates (removing a fixed 2007 reference for non-food services) while keeping the 2007 rate for food and beverage establishments.
• Effective Date:
• Applies to tax years beginning after December 31, 2024.

Significant Changes to Existing Law

• Introduces a new section 224 to the Internal Revenue Code, creating an above-the-line deduction specifically for tips, which did not previously exist in this form.
• Modifies how tips are treated for non-itemizing taxpayers and removes barriers like miscellaneous deduction rules or phase-outs that could limit access.
• Broadens the employer tip credit (section 45B) beyond food and beverage services to include beauty services, and updates wage references for credit calculations to reflect modern minimum wage laws (under the Fair Labor Standards Act), potentially increasing the credit's value for affected employers.
• Requires IRS procedural changes, such as new withholding guidance, to implement the deduction without overhauling broader tax reporting.

Potential Impacts

• On Citizens: Tipped workers (e.g., servers, bartenders, hair stylists) could see increased take-home pay by avoiding income tax on up to $25,000 in tips annually, benefiting lower- and middle-income service employees who rely on tips. However, it does not affect Social Security or Medicare taxes on tips.
• On Government Agencies: The IRS and Treasury Department will face administrative burdens, including publishing occupation lists, updating withholding systems, and processing new deductions, which could require additional resources and IT updates.
• On Employers and Businesses: Food, beverage, and now beauty service establishments gain from the extended Social Security tax credit, reducing payroll costs and potentially encouraging hiring in tipped roles. It may also simplify tip-related compliance.
• On International Relations: Minimal direct impact, as this is a domestic tax policy focused on U.S. workers and businesses.
• Broader Economic Effects: Could boost disposable income for millions in the service sector but may reduce federal tax revenue by billions annually (exact figures depend on implementation and tip volumes).

Main Stakeholders Affected

• Tipped Workers: Primary beneficiaries, including those in hospitality (e.g., waitstaff, delivery drivers) and now beauty services (e.g., stylists, nail technicians), particularly part-time or low-wage employees.
• Employers in Service Industries: Restaurants, bars, salons, and spas that pay tipped wages, gaining tax credits to offset Social Security contributions.
• U.S. Treasury and IRS: Responsible for enforcement, list publication, and system updates.
• Taxpayers Generally: Indirectly affected through potential shifts in federal revenue, which could influence public spending or future tax policies.

Notable Legal, Constitutional, or Political Implications

• Legal: Strengthens tip reporting requirements by tying the deduction to employer statements, potentially increasing IRS audits for unreported tips while simplifying claims for compliant workers. No challenges to tip income taxation existed before, so this creates a targeted exemption without altering core tax principles.
• Constitutional: Aligns with Congress's broad authority under Article I to levy and regulate taxes; unlikely to raise equal protection or due process issues, as it applies uniformly to qualifying tips across taxpayers.
• Political: Represents a form of targeted tax relief for service workers, which could appeal to labor-focused policies but raise debates on fairness (e.g., why cap at $25,000 or exclude high earners?). It may set precedent for industry-specific deductions, influencing future tax reform discussions without broader revenue offsets specified.

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

Sponsor

Sen. Cruz, Ted [R-TX]

Cosponsors (8)

Sen. Daines, Steve [R-MT], Sen. Rosen, Jacky [D-NV], Sen. Ricketts, Pete [R-NE], Sen. Cortez Masto, Catherine [D-NV], Sen. Hawley, Josh [R-MO], Sen. Scott, Rick [R-FL], Sen. Cramer, Kevin [R-ND], Sen. Marshall, Roger [R-KS]

Recent Actions

• 2025-05-26: Held at the desk.
• 2025-05-26: Received in the House.
• 2025-05-23: Message on Senate action sent to the House.
• 2025-05-20: Passed Senate without amendment by Unanimous Consent. (consideration: CR S2993-2995; text: CR S2993-2994)
• 2025-05-20: Passed/agreed to in Senate: Passed Senate without amendment by Unanimous Consent.
• 2025-05-20: Senate Committee on Finance discharged by Unanimous Consent.
• 2025-05-20: Senate Committee on Finance discharged by Unanimous Consent.
• 2025-01-16: Read twice and referred to the Committee on Finance.
• 2025-01-16: Introduced in Senate

Bill Versions

• No Tax on Tips Act — issued 2025-05-20 — PDF (8 pages)
• No Tax on Tips Act — issued 2025-01-16 — PDF (6 pages)