The No Tax on Tips Act was unexpectedly passed by the Senate with a unanimous vote on Tuesday, signaling a potential shift in the federal taxation of cash tips. This legislation has gained traction since being championed during Donald Trump’s presidential campaign. Here’s a detailed look at what the bill entails and how it could impact you.
Officially known as Bill S. 129, the No Tax on Tips Act aims to amend the Internal Revenue Code to create a federal income tax deduction for certain types of cash tips. Eligible employees can claim a deduction of up to $25,000 per year on their tax filings for cash tips received. Introduced by Senator Ted Cruz (R-Texas) in January, the bill was brought to the floor by co-sponsor Senator Jacky Rosen (D-Nevada) for a vote characterized as “unanimous consent,” which is typically reserved for routine legislative matters.
Both Democrats and Republicans have praised the swift passage of this bill as a demonstration of effective bipartisanship. The legislation will now proceed to the House of Representatives for further consideration.
The No Tax on Tips Act proposes significant changes to the tax treatment of cash tips, which include tips received in cash, via credit and debit cards, or checks. The legislation stipulates that only specific occupations traditionally receiving tips as of December 31, 2023, will qualify for this exemption. According to the bill, the treasury secretary must publish a list of eligible occupations within 90 days after the law is enacted.
Senate Minority Leader Charles E. Schumer (D-New York) highlighted that positions such as waiters, bartenders, and delivery drivers would benefit from this tax exemption. To qualify, employees must earn less than $160,000 in the 2024-2025 tax year, a threshold that will adjust annually for inflation. Moreover, employees must report their tips to their employers for payroll tax purposes, ensuring compliance within the system.
The idea of eliminating taxes on tips is not new; it was previously suggested by Ron Paul during his 2012 presidential campaign. However, it gained momentum when Trump endorsed the notion at a Nevada rally in June, resonating with many in the service industry. Vice President Kamala Harris echoed similar sentiments at a campaign event in August, showcasing a broad bipartisan appeal for the proposal.
Despite this enthusiasm, experts warn that the No Tax on Tips Act may not significantly benefit working Americans. A report from the nonpartisan Committee for a Responsible Federal Budget estimates that the legislation could cost the government between $10 billion to $15 billion annually in lost revenue. Analysts from Yale’s Budget Lab indicate that tipped workers represent a small portion of the labor force, often consisting of younger individuals with already low federal income tax liabilities.
Critics of the bill argue that it could inadvertently harm low-income tipped workers by making them ineligible for the earned income tax credit or diminishing their Social Security benefits. Furthermore, there is concern that the legislation might encourage employers to restructure employee compensation in favor of tips over wages, which could lead to a decrease in overall tax revenue.
The Budget Lab noted that an incentive structure might emerge, where workers, employers, and consumers coordinate to maximize the benefits of the new tax break, potentially driving up the number of reported tips while lowering other forms of income.
Before becoming law, the No Tax on Tips Act must gain approval from the House of Representatives. If it passes there, it will be sent to Trump for his signature. Importantly, the House has included a version of the bill within a larger tax and immigration proposal, which also encompasses an extension of Trump’s 2017 tax cuts and significant spending on border security and social services.
Senator Rosen expressed concern that the No Tax on Tips Act could be jeopardized if it remains tied to the controversial broader budget bill. She emphasized the need for the act to be considered independently to avoid forcing working families into a difficult choice between healthcare and tip income.
Despite these challenges, Senator Cruz remains optimistic about the bill’s future, asserting that whether it passes as part of a larger package or as a standalone measure, the No Tax on Tips Act will ultimately become law, providing much-needed relief to hardworking Americans.
