Publications + Presentations

Summary

• The No Tax on Tips Act (S.129) would allow employees to deduct up to $25,000 in reported cash tips from their taxable income.
• Applies to workers in traditionally tipped occupations earning less than $160,000 annually; only cash tips reported to employers qualify.
• The bill would broaden the FICA tip credit to include beauty and personal care services, not just food and beverage.
• Treats tips more like gifts than wages, marking a significant departure from current IRS policy.
• Could reduce tax burdens for millions of workers and lower payroll taxes for employers in tip-heavy industries.
• The bill is under review in the Senate Finance Committee; employers should monitor developments and prepare for possible changes.

Throughout the last election cycle, now-President Trump campaigned on the promise of No Tax on Tips. It appears that the promise will become a reality. Recently, the United States Senate unanimously passed a bill that would allow employees to deduct up to $25,000 in reported cash tips from their taxable income. The No Tax on Tips Act (S.129), introduced by Senator Ted Cruz (R-TX) along with Sens. Jacky Rosen and Catherine Cortez Masto from Nevada, proposes a sweeping change to how the IRS treats gratuities—one that could have ripple effects for both employees and employers in tip-heavy industries.

The bill creates a new above-the-line deduction for “qualified tips,” defined as cash tips received in the course of employment in occupations that customarily receive tips—think servers, bartenders, hairstylists, and others in the service, hospitality, and personal care sectors.

To Qualify:

• The tips must be reported to the employer in accordance with existing IRS rules.
• The employee must earn less than $160,000 in the prior tax year (adjusted annually for inflation).
• Only cash tips are eligible—non-cash tips like tickets or gifts don’t count.

In addition, the bill expands the employer-side FICA tax credit to include tips received in connection with beauty services such as barbering, nail care, esthetics, and spa treatments—an expansion from the current credit, which only applies to food and beverage service.

Why It Matters

This proposal is more than a tax tweak—it’s a philosophical shift. By allowing a deduction for tips, the bill effectively treats gratuities more like gifts than wages, a departure from longstanding IRS policy. You may have seen that a similar, albeit slightly different proposal removing the tax on tips and overtime has been included in the recent budget bill being debated in the US House of Representatives.  It is unclear which portions of the various provisions will survive, but it seems increasingly likely that workers in industries where tips make up a substantial portion of income a tax break is on the way.

While some employers, like those in beauty and wellness sectors, will benefit from the FICA expansion - many employers in tip heavy professions may struggle to find management employees as they will not be eligible for tips or the tip deduction thereby potentially sinking management employees take home income below those of the tipped employees they supervise.

What’s Next?

The bill has been referred to the Senate Finance Committee where it awaits further action. While it’s too early to predict its fate, the proposal is already generating buzz—both for its potential economic impact and its political implications.  Given that this type of legislation was a campaign promise from Republicans and Democrats alike last November, it is unlikely that both of the two pieces of legislation do not pass.  Employers should begin a review of their compensation systems to determine how they may need to be adjusted.   

Takeaway for Employers

If you operate in a tip-heavy industry, now is the time to:

• Review your tip reporting practices to ensure compliance.
• Review your compensation system to determine whether adjustments need to be made relative to the likely increase in take-home cash for tipped employees.
• If you’re not utilizing the full tip credit, you should consider whether adjusting to utilize the full tip credit will provide some cost savings or be requested by your employees as a way to maximize the income they receive that can be deducted.

As always, we’ll continue to track this legislation and provide updates as it moves through Congress. If you have questions about how this bill could affect your business or your workforce, don’t hesitate to reach out to Brendan Feheley or Danielle Crane.