What the Senate ‘no tax on tips’ bill could mean for workers

The Senate this week unanimously passed the No Tax on Tips Act in a surprise vote, which could boost momentum for an idea floated by President Donald Trump during his 2024 campaign. 

If enacted, the legislation would create a federal income tax deduction of up to $25,000 per year, with some limitations. The tax break applies to workers who typically receive cash tips reported to their employer for payroll tax withholdings, according to a summary of the bill, which was passed by the Senate on Tuesday. 

To qualify for the deduction, there’s a $160,000 earnings limit for 2025. That limit would be indexed for inflation yearly.

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Currently, workers who receive cash tips of $20 or more monthly must report those earnings to employers, according to the IRS. Cash tips can include funds received directly from customers, tip-sharing from other employees or tips paid via credit card.

During the 2024 presidential campaign, Trump and Vice President Kamala Harris both called for no tax on tips during appearances in Nevada.

The bill advanced by the House Ways and Means Committee last week also includes a no tax on tips provision. If enacted, workers could deduct all “qualified tips” from 2025 through 2028. Tips must be reported to qualify for the deduction. However, this could still change before the full House floor vote.

“Whether it passes free-standing or as part of the bigger bill, one way or another, no tax on tips is going to become law and give real relief to hard-working Americans,” Sen. Ted Cruz, R-Texas., said from the Senate floor on Tuesday. 

Cruz introduced the bipartisan bill in January with Sens. Jacky Rosen and Catherine Cortez Masto from Nevada.

In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment, according to estimates from The Budget Lab at Yale University.

“This is a very narrow subset of the workforce,” said Alex Muresianu, senior policy analyst at the Tax Foundation. 

Tipped occupations include jobs in restaurants and hotels, as well as courier services like taxis, ride-shares and food delivery services, he said.

What’s more, a good chunk of tipped workers are part-time employees, and they wouldn’t see a significant benefit from a tip exemption, he said. Many such workers already don’t pay federal income tax because their earnings fall under the standard deduction.

“For the lowest income tipped workers, it provides no marginal benefit” Muresianu said. “It would benefit moderate to middle income workers substantially.”

A no tax on tips policy could create several issues, Muresianu said.

For example, there could be the introduction of tips in new occupations, or a shift in compensation in already tipped occupations toward a greater reliance on tips. It’s also possible that income could be misclassified as tips to take advantage of the tax benefit, he said.

“It’s tough to model or project because tipping is a social behavior, not strictly an economic transaction,” Muresianu said.

From a general economic standpoint, it doesn’t make sense to treat one type of income earned in specific industries differently than another type of income, he said. Take, for example, a waitress and a retail cashier: Both earn $35,000, but the waitress makes $10,000 in tips, which would be tax exempt.

“Why does the cashier pay full income tax on her income but the waitress gets a very substantial tax exemption?” he said. “That clearly violates some principle of fairness.”