Understanding the Proposed ‘No Tax on Tips’ Legislation and Its Implications for Employees and Businesses

Millions of service industry employees in America, including bartenders, barbers, delivery personnel, and nail technicians, are closer to not having to pay taxes on their tips.

The Senate has unanimously approved the No Tax on Tips Act, a comprehensive measure that would change how tip income is taxed in the U.S., showcasing rare bipartisan agreement. If enacted, the law would exempt up to $25,000 in tips from federal income taxes.

The bill, a key promise from President Donald Trump’s campaign, is now headed to the Republican-controlled House, where it is widely supported.

Senate Minority Leader Chuck Schumer stated in a that they are a step closer to removing taxes on tips for hardworking Americans following the Senate’s approval of the bill. He added that these Americans, such as servers, bartenders, and delivery drivers, deserve the tax break, not the wealthy.

The proposal to eliminate taxes on tips gained momentum during the 2024 campaign, with showing that most Americans support it, although opinions are divided on the potential effects of the policy. Some economists and labor advocates have also voiced concerns.

Here’s what the bill could mean for workers and businesses.

How would the No Tax on Tips Act impact workers?

The No Tax on Tips Act would modify the IRS Code to eliminate income tax on tips.

Employees who regularly received tips before December 31, 2023, would be exempt from paying taxes on up to $25,000 in tip income. This includes waiters, bartenders, and delivery drivers. Beauty professionals like barbers, estheticians, and nail technicians would also benefit. The U.S. Treasury Secretary will provide a complete list of eligible occupations 90 days after the bill’s enactment.

To be eligible for the tax deduction, employees must have earned less than $160,000 for the 2024-2025 tax year. If the bill passes, this income requirement will be adjusted for inflation.

The exemption would affect only a small portion of the country’s workforce. The estimates that around 4 million people in the U.S. worked in tipped occupations in 2023, which is about 2.5% of all U.S. workers. Other estimates, such as those from the Economic Policy Institute (EPI), place the percentage of tipped workers at about 5%.

Despite its widespread appeal, economists suggest that cutting taxes on tips could negatively impact service industry workers. Currently, 37% of tipped workers . Experts worry that the new policy might encourage employers to . The tax change could also affect their eligibility for programs like the child tax credit and earned income tax credit, or lower their Social Security contributions.

The No Tax on Tips Act might also change the culture of tipping in the U.S. Experts caution that businesses may start encouraging or requiring tips to reduce labor costs. According to a Pew Research Center , 72% of Americans already feel they are being asked to tip more often.

How would the No Tax on Tips Act impact businesses?

The No Tax on Tips Act also increases the business tax credit for the part of payroll taxes that businesses may have previously paid on certain employee tips.

The National Restaurant Association expressed its support for the bill in January, citing its potential benefits for workers and employers.

The organization stated in a that eliminating taxes on tips would provide more income for many workers in the restaurant and foodservice industry, and it could help restaurant operators recruit employees. They added that tax policy is important to the success of the restaurant industry, and they will continue to work with Congress on this and other tax policies that will encourage investments and improvements in restaurants and help operators invest more in their workforce and communities.