Senate Approves “No Tax on Tips Act”: What It Means for Workers and Employers
- Adam Tahir
- May 21
- 2 min read
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.
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