No Tax on Tips Act: Status and Implications

In a surprise vote on May 20, 2025, the U.S. Senate unanimously passed a standalone “No Tax on Tips Act” to provide tipped workers a tax break on gratuities. As of now, the tax break is being incorporated into the “One, Big Beautiful Bill,” which is being negotiated by the Senate after winning House approval on May 22. This measure would put additional money into the pockets of tipped workers who qualify. Such employees would be able to deduct up to $25,000 in tips unless they earned more than $160,000 in a year. That cap would be indexed to inflation over time and would be adjusted annually. It is important to note that the overall earnings from tipped and non-tipped jobs are used to calculate total earnings.

The federal tax code requires that every tip be reported as income. Whether it is cash handed to a restaurant worker, a tip line added on a check paid with a credit card, or a button pressed on a point-of-sale device, employees and employers are required to track and report every cent. This is true whether each worker keeps the tips or the money is pooled and shared with coworkers.

In the tax code and this legislation, the term “cash tip” applies to tips given in hard currency, on a credit or debit card, or through the business’s electronic payment system.   Legislators have not yet addressed whether payments made through apps like Venmo, Zelle, or PayPal would qualify as cash tips. Service charges levied by the business are not considered tips.

The proposed legislation makes tip income exempt from federal income taxes. That amount would be subtracted from reported income as an above-the-line deduction on a tax return, thereby reducing the amount of income tax owed. The tips would still have to be tracked and reported through the employee’s W-2.

The bill applies to all tipped workers in the restaurant business, including servers, coffee baristas, food delivery drivers, and anyone holding out a payment screen after they have sold you food or other items. This amounts to over two million tipped restaurant workers in the United States.

The federal minimum wage is staying at $7.25 per hour. Employers have been allowed to pay tipped workers a lower amount as long as the employee’s tips bring the total up to the minimum wage. These tips are also subject to income tax.

Some restaurants allow servers to keep all their tips; others require tip pooling, which shares the money with bussers, bartenders, and other front-of-house staff members. This bill would not change who receives tips or how they are allocated. Back-of-house employees, including chefs, cooks, expos, and dishwashers, cannot receive tips unless participating in a legal tip pool.

Employers must continue to pay taxes for Medicare, Social Security, and unemployment based on employees’ total wages, including tips.

The proposed legislation would expand the tip credit to beauty businesses, such as salons and spas, while the restaurant portion remains unchanged. Employers receive a credit for a portion of the Medicare and Social Security taxes paid on tipped wages exceeding the federal minimum wage. They will need to monitor legislation to ensure there are no changes to this provision.

The effective date of the tax cuts is uncertain—the bill has moved to the House for consideration. Again, the provision may be included in the larger budget bill.

The CBIZ Food & Beverage industry specialists will continue to monitor this legislation. Please contact us if you have any questions.