No Tax on Tips Act

The No Tax on Tips Act, which passed the Senate, is now being considered by the House of Representatives. If enacted, this bill would create a new federal tax deduction allowing eligible workers to deduct up to $25,000 in tips from their taxable income. The deduction would apply only to cash tips that workers report to their employers, as required by current law for tips exceeding $20 per month, and only for workers employed in occupations that customarily receive tips.

The bill includes an important income limitation: workers whose total compensation exceeded $160,000 in the prior tax year would not be eligible to claim the tip deduction. This threshold would be adjusted annually for inflation. The deduction is designed to reduce the tax burden on service workers in industries like restaurants, bars, and other tipped positions.

Additionally, the bill would expand an existing business tax credit for employers. Currently, employers can claim a credit for payroll taxes paid on tips received in food and beverage service. The bill would extend this credit to include tips received in beauty services, such as barbering, hair care, nail care, esthetics, and spa treatments. This expansion would provide tax relief to employers in these service industries as well.

For everyday citizens who work in tipped positions and earn below the income threshold, this bill would reduce their federal income tax liability by allowing them to exclude reported tips from their taxable income, potentially resulting in lower tax bills or larger refunds.