Will the No Tax on Tips Act bring real relief for servers and bartenders?

Under President Donald Trump’s administration, the Senate unanimously passed the No Tax on Tips Act on May 20, 2025. The legislation would exempt up to $25,000 in tips from federal income tax for eligible workers, with some limitations.

To qualify for the tax deduction, workers must have earned less than $160,000 for the 2024-2025 tax year. If the bill becomes a law, this limit will be indexed for inflation. 

Bill S.129, introduced by Sen. Ted Cruz in January, creates a federal income tax deduction for workers in occupations that traditionally receive tips. Individuals working as waiters, barbers, or delivery drivers who receive tips in cash, credit and debit card, and check are examples of employees eligible for the exemption. 

“This legislation will have a lasting impact on millions of Americans by protecting the hard-earned dollars of blue-collar workers, the very people who are living paycheck-to-paycheck,” Cruz said in a statement.

Sen. Jacky Rosen (D-Nevada), a co-sponsor of the bill, brought it forward for unanimous consent. The strong bipartisan support showed the political momentum the idea had gained during Trump’s 2024 campaign. The measure now heads to the House of Representatives for consideration.

Senate Minority Leader Charles Schumer (D-New York) said, “Working Americans—from servers to bartenders, delivery drivers, and everything in between—work hard for every dollar they earn and are the ones who deserve tax relief, not the ultra-rich.”

Key provisions of the No Tax on Tips Act include:

• The deduction applies only to workers in occupations that “customarily received tips” before Dec. 31, 2023.
• The Treasury must publish a list of these occupations within 90 days of enactment.
• Eligible workers must earn less than $160,000 annually.
• Tips must still be reported for payroll tax purposes.

The bill also increases tax credits for businesses that pay the payroll taxes on tips earned by workers in jobs like barbering, hair care, nail care, esthetics, and spa services. A tax break on tips could significantly boost take-home pay for workers already struggling with inflation and high housing costs.

Tipped workers are a small portion of the workforce and are typically younger than their non-tipped counterparts. Many of them already pay very little in federal income taxes, according to Yale’s Budget Lab. The law might lead employers to pay more in tips instead of wages or prompt workers to label a larger portion of their income as tips to avoid taxes. This could make the plan more expensive, the analysis mentioned.

The Budget Lab stated in a previous analysis that workers, employers, and others may collaborate to benefit from the new tax break. As a result, tips could increase while other types of income decrease, making the plan more costly for the government. Some economists warn that the policy might harm low-income tipped workers by making them ineligible for the Earned Income Tax Credit or reducing their Social Security benefit credits from tip income.

During the campaign, Trump’s team said the plan would make reporting tips on tax returns easier and help boost the economy by increasing consumer spending. The House must approve the Senate version before it can become law. However, a version of the No Tax on Tips Act is also included in a larger Republican bill that combines tax cuts, immigration measures, and spending reductions.

The broader legislation, known as the One Big Beautiful Bill Act, proposes extending Trump’s 2017 tax cuts, massive border security spending, and controversial cuts to Social Safety net programs. Trump visited Capitol Hill on May 20 to lobby Republican holdouts on the larger package.

House Republicans could separate the tips legislation from the broader bill for a standalone vote. The House version contains key differences from the Senate bill, including a requirement that individuals claiming the deduction have Social Security numbers. If married, their spouses must also have Social Security numbers, even if they are not claiming tips themselves. This provision would effectively block temporary and unauthorized immigrants from claiming the deduction.

The House version also sets an expiration date of Dec. 31, 2028, for the deduction, while the Senate bill contains no sunset provision.

Rosen warned that including the No Tax on Tips Act in the broader Republican bill could doom its prospects. “We should not be forcing working families to choose between keeping their health care or keeping their tips, which is why we want this bipartisan bill on its own — on its own — not part of a harmful, extreme budget bill,” Rosen said.

Cruz expressed confidence that the tips legislation would eventually pass, regardless of the legislative path.

The proposal builds on an idea that has circulated in political circles for years. Former Rep. Ron Paul suggested a similar concept during his 2012 Republican presidential campaign, though it failed to gain widespread support at the time.