No Taxes on Tips?
What’s the Deal with the Proposed Law and When Will It Pass?
For years, workers in the service industry have been taxed on their tips, often scraping by on minimum wages plus whatever gratuities they receive. Now, a proposed bill is aiming to change that by eliminating federal income tax on tips altogether. But what’s the real story behind this legislation, and when—if ever—will it actually become law?
What’s in the Bill?
The No Taxes on Tips Act, proposed by members of Congress in early 2025, seeks to exempt all tipped income from federal taxation. The bill argues that tips are a voluntary gift from customers, not employer-paid wages, and therefore should not be taxed as regular income.
Currently, service industry workers in the U.S. are required to report their tips as taxable income. Employers with tip-reporting agreements submit estimates of employee tips to the IRS, and servers, bartenders, and other tipped employees are taxed accordingly. The proposed law would put an end to this practice, treating tips as tax-free earnings.
Why Is This Happening Now?
There are a few key factors pushing this bill into the spotlight:
Rising Cost of Living – Inflation has hit the service industry hard, making it more difficult for workers to make ends meet. Supporters argue that removing taxes on tips is a way to put more money in workers’ pockets without increasing labor costs for businesses.
Fairness in Taxation – Proponents argue that tips are fundamentally different from wages since they come directly from customers, not from employers. They claim it’s unfair to tax money that is a direct gift for good service.
Encouraging Hospitality Jobs – With the hospitality industry struggling to fill positions post-pandemic, some believe that eliminating taxes on tips could incentivize more people to return to service jobs.
Who’s For and Against It?
The bill has gained traction among some lawmakers, particularly those advocating for lower taxes and reduced government oversight of personal income. Restaurant and hospitality groups have also shown support, arguing that the tax break would boost morale and keep more workers in the industry.
However, opponents raise concerns about revenue loss for the government. The taxation of tips contributes billions to federal income tax collections, and eliminating it would create a significant gap. Critics also argue that this law could create loopholes for employers to exploit—potentially reducing wages further and making tips the only real source of income for some workers.
When Could It Pass?
Passing any tax-related legislation is a slow and complicated process. The bill is currently in committee, with hearings expected to take place over the next few months. If it gains enough support, it could move to a vote later this year. However, with a divided Congress, its fate remains uncertain.
Some experts predict that even if the bill doesn’t pass in its current form, a compromise could be reached. One possible alternative is reducing tax rates on tips rather than eliminating them altogether.
How Would This Impact the Service Industry?
If passed, this law could have a huge impact on servers, bartenders, delivery drivers, and other tipped workers. Here’s what it could mean:
More Take-Home Pay – Workers would keep 100% of their tips, providing an immediate financial boost.
Less Hassle with Reporting – No more tracking cash tips or worrying about IRS audits for underreporting.
Potential Changes to Wage Structures – Some fear that if tips become tax-free, employers may start paying even lower base wages, assuming workers will make up the difference in untaxed tips.
We’ll See, I Guess!
Whether this bill passes as-is, gets modified, or ultimately fails, it has already sparked an important conversation about the fairness of taxing tips. For now, service workers should keep an eye on Congress and be prepared for potential changes that could impact their paychecks. If nothing else, this debate shines a light on the financial struggles of tipped workers and the ongoing effort to make the industry more sustainable for those who rely on gratuities to make a living.
As for when it will pass? That remains the billion-dollar question. But one thing’s for sure: service industry workers will be watching closely.
