For millions of workers in the service industry, tips are more than just extra income—they are a crucial part of their earnings. However, current federal tax laws classify tips as taxable income, subjecting them to income tax, Social Security tax, and Medicare tax. This system has long been criticized for placing an unfair burden on employees who rely heavily on gratuities to make ends meet.
Now, a new legislative effort—the No Tax on Tips Act—aims to change that. If passed, this bill would eliminate federal income taxes on reported cash tips, significantly increasing take-home pay for service workers. The proposal has gained bipartisan support and is currently making its way through the U.S. Congress. But when will these changes go into effect, and what are the latest developments? Let’s break it all down.
Understanding the No Tax on Tips Act
Introduced in January 2025, the No Tax on Tips Act is a bipartisan effort led by Senator Ted Cruz (R-Texas) and Senator Jacky Rosen (D-Nevada). The bill aims to amend the Internal Revenue Code to allow workers in tipped industries to deduct up to $25,000 annually in reported cash tips from their taxable income.
The key goal of this legislation is to provide financial relief for tipped workers, ensuring that more of their earnings stay in their pockets rather than going to taxes.
Key Provisions of the Bill
The No Tax on Tips Act includes several important provisions designed to help service industry workers:
- Tax Deduction for Cash Tips: Employees in tipped industries can deduct up to $25,000 in reported tips from their federal taxable income.
- Eligibility Based on Income: The bill applies to workers earning $160,000 or less per year, with adjustments for inflation.
- Industries That Benefit: Hospitality, food service, and delivery sectors—where tipping is customary—would see the greatest impact.
- Expansion of Employer Tax Credits: Businesses that pay payroll taxes on reported tips may qualify for additional tax credits to offset costs.
These provisions aim to support service workers while ensuring businesses continue to comply with payroll tax regulations.
Recent Developments: Where Does the Bill Stand Today?
The No Tax on Tips Act has made substantial progress in the legislative process:
- May 20, 2025: The U.S. Senate unanimously passed the bill, showing strong bipartisan support.
- Next Step – House of Representatives: The bill is currently awaiting debate and a vote in the House.
- Presidential Approval Pending: If the House passes the bill, it will go to the President’s desk for signature and become law.
Given its widespread support, experts predict the House will likely pass the legislation before the end of June 2025. If that happens, the tax exemption for tips would take effect starting January 1, 2026, meaning workers could claim deductions for the 2025 tax year when filing in 2026.
How Will the Changes Impact Workers and Businesses?
The passage of the No Tax on Tips Act could fundamentally transform income structures for millions of workers and businesses across the United States.
For Service Workers
- Higher Take-Home Pay: Without federal income tax on tips, workers will keep more of their earnings.
- Greater Financial Stability: Many tipped workers live paycheck to paycheck, and this tax relief could help them better manage expenses.
- Encouragement to Report Tips: Since cash tips would be tax-free, employees may be more inclined to accurately report their earnings.
For Businesses
- Payroll Tax Considerations: Employers will still need to withhold Social Security and Medicare taxes on reported tips.
- Boost to Hiring Efforts: With workers earning more, businesses may find it easier to attract and retain staff.
- Compliance Adjustments: Employers will need to update payroll systems to reflect the new tax-exempt status of cash tips.
Challenges and Controversies Surrounding the Bill
While the No Tax on Tips Act has been widely praised, it also faces some criticisms and concerns:
- Income Reclassification Issues: Critics warn that businesses might attempt to categorize wages as tips to reduce tax liabilities.
- Cost to the Federal Government: The bill is expected to reduce government tax revenue by an estimated $110 billion over the next decade.
- Possible State-Level Implications: The bill only applies to federal income tax, meaning state taxes on tips may still apply in certain locations.
Policymakers will need to monitor these concerns carefully to ensure that the bill does not lead to unintended loopholes or abuses.
Conclusion: What’s Next for the No Tax on Tips Act?
This act represents a historic shift in tax policy for service industry workers. If passed, it will provide financial relief to millions of Americans who rely on tips as a primary source of income.
However, the bill’s future remains in the hands of the House of Representatives. With strong bipartisan support, many expect the bill to pass within the next few months, potentially going into effect in January 2026.
For now, workers and business owners should stay informed on legislative updates and prepare for possible changes in tax reporting. If the bill is signed into law, it will mark a pivotal moment for the service industry—one that redefines how tips are taxed in the United States.