Both Donald Trump and Kamala Harris endorsed “no tax on tips” in the 2024 presidential election. The discussion continues gaining momentum, and several bills (“No Tax on Tips Act” and “The One, Big, Beautiful Bill”) bring it into the spotlight.
But will it happen? It could. On May 20, 2025 the Senate unanimously passed the “No Tax on Tips Act,” which now heads to the House. And on May 22, 2025, the House narrowly passed “The One, Big, Beautiful Bill,” which now heads to the Senate. If either of these bills becomes a law, no tax on tips becomes a reality.
If you employ workers who regularly receive tips, the no tax on tips policy would directly impact your employees on payroll. Here’s what to know.
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Overview of tipped income and taxation
Some employees (e.g., restaurant servers, nail technicians, etc.) regularly and customarily receive tips as part of their income. Tipped employees receive more than $30 per month in tips.
Customers typically leave cash tips or electronic tip payments (e.g., via credit and debit card), or employees can receive tips from a tip pooling agreement. According to the IRS, these are all considered “cash tips.”
Employers must pay tipped employees at least the tipped minimum wage, which varies by state. The tipped minimum wage is a lower hourly rate than the regular minimum wage.
How do taxes on tips work? Employees must report all tips to their employers if they receive $20 or more tips during a month. All reported tips are subject to federal income, Social Security, and Medicare taxes (plus state and local taxes, where applicable).
As the employer, you must withhold taxes from the employee’s tipped income, remit it to the proper agencies, and report the income and taxes on Form 941 and the W-2 form for employees.
What is the no tax on tips proposal?
Momentum has been building for a new law that would eliminate federal tax on tips, something only a small portion of the U.S. workforce typically receive.
Donald Trump and later Kamala Harris ran their campaigns promising no tax on tips. The Senate introduced the “No Tax on Tips Act” in January 2025, which passed unanimously on May 20, 2025. It now heads to the House to be signed.
The House also introduced “The One, Big, Beautiful Bill,” which includes a no tax on tips rule, on May 12, 2025. It passed narrowly in the House on May 22, 2025 and now heads to the Senate. “The One, Big, Beautiful Bill” would eliminate taxes on tips starting in 2025 and going through 2028.
How would a no tax on tips law work? Cash tips that an individual receives in an occupation that traditionally and customarily receives tips would qualify for a tax deduction for the total tipped income received. Again, the IRS defines “cash tips” as all tips received from customers, charged tips (e.g., credit and debit card charges), and tips received under a tip-sharing agreement.
The following tipped services are examples that would qualify for the tax deduction:
- Providing, delivering, or serving food or beverages for consumption
- Barbering and hair care
- Nail care
- Esthetics
- Body and spa treatments
The tax exemption for tips would not apply to highly compensated employees. It would only be available to those who make up to $160,000. The tax deduction amount is $25,000 under the “No Tax on Tips Act.”
A no tax on tips law would only eliminate federal tax and not state or local taxes.
| Several states are also noodling a no tax on tips and overtime law. |
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| Several states (e.g., Alabama, North Carolina, and New Jersey) have also proposed legislation to eliminate state income tax on tips and overtime pay. |
Additionally, “The One, Big, Beautiful” bill includes a no tax on overtime rule, increase the standard deduction, increase the child tax credit, and more.
Heads up! Introduced bills need to pass in the House and Senate and be signed into law by the president to become a law. This could take several rounds of negotiations and changes. Getting a bill to become law could span weeks or even months, if it happens.
What do employers need to do if a no tax on tips bill passes?
Currently, you must withhold, remit, and report taxes on tipped income to the IRS. If the bill passes, you would likely continue withholding, remitting, and reporting taxes as normal.
However, tipped employees would be able to claim a tax deduction equal to the amount of cash tips (up to the limit) they report in a year when they file their tax returns.
The tipped employee might adjust their W-4 form to lower their tax withholding throughout the year, prompting you to update your payroll.
The proposed tax exemption applies to federal income tax. Cash tips will still be subject to Social Security tax and Medicare tax.
Currently, there is a lot up in the air. Stay tuned to see whether the bill becomes a law and if it will impact your responsibilities.
FAQs
Yes, tips are still being taxed in 2025. However, there is a potential no tax on tips bill that would provide a tax deduction for cash tips earned by qualifying tipped employees.
Federal income tax on tips may “go away” if the “No Tax on Tips Act” or “The One, Big, Beautiful Bill” passes in the House and Senate and is signed into law by the president.
Qualifying tipped employees would be able to claim a tax deduction equal to the amount of cash tips received.
State tax on tips may go away if states pass their own legislation.
According to the IRS, cash tips include tips received from customers, charged tips (e.g., credit and debit card charges), and tips under a tip-sharing arrangement.
Employees must report all tips to their employers if they make $20 or more in tips.
The proposed tax deduction for tips would be available to those who make up to $160,000 per year.
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This article has been updated from its original publication date of May 14, 2025.
This is not intended as legal advice; for more information, please click here.
