No Tax on Tips Act Passes the Senate: What It Means for Service Workers and Taxpayers

The U.S. Senate passed the No Tax on Tips Act with a rare 100-0 vote. This bipartisan bill would allow service industry workers to deduct up to $25,000 in reported cash tips from their federal income taxes. The legislation was then included in the “Big, Beautiful Bill” passed by the House of Representatives. If that larger bill passes the Senate and is signed into law by President Trump, it would mark one of the most significant changes to how tipped income is treated under federal law. 

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How Tips Are Currently Taxed in the United States 

Under current IRS regulations, workers who receive $20 or more in tips per month must report them to their employer. Those tips are then added to their regular wages and subject to federal income tax, Social Security, and Medicare withholding. Employers are required to keep records and ensure proper tax withholding based on those reports. This system has long been criticized by service workers and advocates who say it punishes low-wage earners for income that is often inconsistent and partially unreported. 

Tips Make Up More Than Half of Many Workers’ Pay 

Tipped workers, especially those in full-service restaurants and bars, depend heavily on gratuities. A 2024 study by ADP Research found that tips account for approximately 57% of total earnings for restaurant servers and over 54% for bartenders. These roles are among the most reliant on tipped income in the economy. The new bill would only apply to individuals earning less than $160,000 annually and would still require the payment of payroll taxes. 

How Much Are Americans Really Tipping? 

The U.S. economy sees tens of billions of dollars in tipped income each year. Official figures put the amount of reported tips around $36 billion, but IRS estimates suggest that over half of tips may go unreported, meaning the actual figure could be significantly higher. Supporters of the bill argue that offering a tax deduction will encourage more accurate reporting while giving relief to workers who are already taxed heavily on income they have to solicit or receive directly from customers. 

The Potential Cost of No Tax on Tips 

Critics of the No Tax on Tips Act argue that the bill could lead to $10–15 billion in lost federal revenue each year, while opening the door to potential abuse and income misclassification. Tax policy experts at the Yale Budget Lab warn that the deduction could be exploited if not tightly enforced, especially if workers underreport base wages to maximize the tax break. 

Tipping Fatigue 

This legislation comes during what many are calling a “tip fatigue” moment in the U.S. As tipping prompts have expanded to include fast-food counters, coffee shops, and even self-checkout kiosks, consumer frustration has grown. A 2023 survey by Capterra found that 70% of Americans felt pressured by digital tipping prompts, and tipping rates are declining, particularly among younger Americans like Gen Z.