The ‘No Tax on Tips’ Act is a newly passed bill by the US Senate, led by Republicans, that aims to provide significant tax relief for millions of American workers who rely on tips as a major part of their income. The legislation, introduced by Senator Ted Cruz and supported by a bipartisan coalition, was passed unanimously in the Senate and now moves to the House of Representatives for further consideration.
Under the proposed law, employees in occupations that customarily receive tips—such as restaurant servers, bartenders, hotel staff, salon workers, and drivers, will be allowed to deduct up to $25,000 per year in cash tips from their taxable income.
This deduction applies only to tips that are reported to employers for payroll tax withholding. The benefit is targeted at workers earning up to $160,000 annually, with this income threshold set to adjust for inflation in future years. Those earning above this limit would not be eligible for the deduction.
The bill also includes an expansion of the existing business tax credit for employers. Currently, businesses can claim a tax credit for payroll taxes paid on tips received by employees in food and beverage service roles. The new act broadens this credit to include payroll taxes paid on tips received in connection with beauty services such as barbering, hair care, nail care, esthetics, and spa treatments.
It is important to note that while the act provides an income tax deduction for eligible tips, it does not exempt tips from Social Security and Medicare payroll taxes. Workers must still report their tips to employers, and payroll taxes will continue to be withheld as usual. The deduction is structured so that workers will claim it when filing their annual tax returns, rather than having tips automatically excluded from taxable income.
The ‘No Tax on Tips’ Act is expected to benefit millions of service industry workers, particularly in states like Nevada where tipping is a significant part of the economy. However, it does not apply to non-cash tips or to workers who do not typically receive tips as part of their compensation.
The measure has garnered support from industry groups but has also faced criticism from some labour economists and advocates who argue that it may not benefit the lowest-earning workers, many of whom already pay little or no federal income tax.
If approved by the House and signed into law, the deduction would take effect for the 2025 tax year, allowing eligible workers to claim the benefit when filing taxes in early 2026. The act represents a major policy shift in the taxation of tip income in the United States and fulfills a campaign promise made by former President Donald Trump to eliminate federal income tax on tips for service workers.
