Background
In a bipartisan surprise move, the U.S. Senate unanimously passed the No Tax on Tips Act (S. 129) on May 20. Originally introduced by Senator Ted Cruz (R-TX), the bill reflects a policy championed by former President Donald Trump and enjoys support across party lines, including Democratic Senators Jacky Rosen and Catherine Cortez Masto of Nevada.
The House version of this provision is already included in the “One Big Beautiful Bill” (H.R. 1)—a broader budget package that passed narrowly.
💸 What the Bill Does
The bill aims to exempt qualified tip income from federal income tax. Here are the key provisions:
✅ 100% Tax Deduction on Tips
- Who qualifies? Workers in occupations that traditionally received tips before December 31, 2023.
- What’s deductible? Cash tips up to $25,000 annually can be fully deducted from taxable income.
📊 Eligibility Clarified by Treasury
- Within 90 days of the bill’s enactment, the Treasury Department must issue a list of qualifying occupations, based on pre-2024 data.
- Purpose: To ensure this benefit targets frontline service workers like waiters and baristas, not corporate executives.
📝 For Itemizers and Non-Itemizers
- Applies to non-itemizers under IRC Sec. 63(b).
- For itemizers, limitations under Sec. 67(b) and 68(c) would not apply, making the deduction broadly accessible.
🌺 Beauty and Food Service Industries Included
- Expands the tip credit under IRC Sec. 45(b)(2) to include:
- Beauty services: Hair care, nail care, esthetics, spa treatments.
Food & beverage services, where tipping is customary.
🔄 Senate vs. House Versions
The Senate bill (S.129) is standalone, with bipartisan guardrails to prevent abuse (e.g., high earners falsely classifying income as tips).
The House version is embedded in a larger budget bill with controversial cuts to Medicaid and SNAP, leading to political friction.
🚧 Concerns & Safeguards
Senator Rosen emphasized the importance of passing the bill independently, stating:
“We shouldn’t be forcing working families to choose between keeping their healthcare or keeping their tips.”The Senate version includes safeguards to prevent wealthy individuals from misclassifying high salaries as tip income, avoiding the misuse of the benefit.
⚡ Impact for Businesses & Workers
💼 For Employers
- Payroll simplicity: Lower taxable income for workers may impact withholding and payroll reporting.
- Workforce morale: An added benefit for hiring and retaining workers in hospitality and personal care industries.
🧍♂️ For Workers
Fair treatment: Ensures that service workers benefit from the tax code, not just high earners.
Bigger paychecks: Tax-exempt tips mean more take-home income.
🌐 What’s Next?
The Senate-approved bill now awaits House action. If passed, it will be sent to the President’s desk for signature. If the House prefers its embedded version, a conference committee may be needed to reconcile the two.
🔗 References
- No Tax on Tips Act (S.129)
- H.R. 1 (“One Big Beautiful Bill”)
- IRC Sec. 63(b), 67(b), 68(c), 45(b)(2), 45B
- U.S. Senate Floor Statements, May 20
- Congressional Research Service, FAQs on Reconciliation
