Senate Approves “No Tax on Tips Act”: What It Means for Workers and Employers

On May 21, 2025, the U.S. Senate unanimously passed the No Tax on Tips Act, a landmark piece of legislation allowing workers in tipped industries to deduct up to $25,000 in tips from their taxable income.

This bipartisan win marks a major shift in how service workers will be taxed — and how businesses in industries like hospitality, beauty, and personal care will manage compliance and payroll.

Here’s what tax professionals, employers, and employees need to know.

Quick Summary

• What passed: A $25,000 federal tax deduction for eligible tip income

• Who qualifies: Workers earning less than $160,000/year who report tips through payroll

• What else is included: Payroll tax credits for small businesses in service industries

• What’s next: The bill heads to the House for final approval

What Is the No Tax on Tips Act?

The No Tax on Tips Act is designed to provide relief to low- and middle-income service workers who rely on tips — such as:

• Restaurant servers

• Bartenders

• Barbers

• Massage therapists

• Nail technicians and estheticians

• Hotel and hospitality workers

Under this legislation, up to $25,000 in tips per year will be exempt from federal income tax, provided the worker accurately reports those tips to their employer for tax withholding.

Key Provisions at a Glance

Provision	Details
Deduction Limit	Up to $25,000 in tip income
Income Cap	Applies to individuals earning ≤ $160,000/year
Reporting Requirement	Tips must be reported through payroll for eligibility
Business Credit	Employers in beauty/spa industries receive a payroll tax credit
Status	Passed Senate unanimously; moves to House next

Why It Matters

This bill directly addresses a long-standing concern in the tax world: the inconsistent treatment of tip income. Workers who depend on variable tips often face tax burdens that don’t reflect the volatility of their income streams.

This deduction:

• Lowers effective tax rates for hourly and part-time workers

• Incentivizes honest tip reporting

• Offers real savings in industries where base wages are often below minimum wage

What Employers Should Know

Employers in tipped industries — especially salons, spas, and restaurants — should prepare to:

• Update payroll software to track eligible tip income deductions

• Educate employees about how to report tips properly

• Evaluate qualification for the new payroll tax credits offered in the bill

If the House passes the legislation and the President signs it into law, these changes could take effect starting with the 2026 tax year.

Who Supported It?

The bill was co-sponsored by:

• Senator Ted Cruz (R-TX)

• Senator Jacky Rosen (D-NV)

• Senator Catherine Cortez Masto (D-NV)

The bipartisan nature of the vote (100–0) signals strong political momentum heading into House discussions.

Bottom Line

If signed into law, the No Tax on Tips Act would represent one of the most worker-focused tax changes in years — with meaningful savings for millions of service workers.

Tax professionals should begin modeling scenarios for clients in hospitality, retail, and beauty to project potential savings and compliance adjustments.

Bizora AI will continue tracking the bill’s progress in the House and provide actionable updates for firms supporting tipped workers and service-based employers.