No Tax on Tips

On May 20, the Senate passed the No Tax on Tips Act by unanimous consent. That was just two days before the House passed Trump's One Big Beautiful Bill with its “no tax on tips” provision. The passage of the No Tax on Tips Act as a stand-alone bill in the Senate comes without the damage the House bill would inflict on service and tipped workers. One Fair Wage, a national advocacy group for service workers, estimates that if the House bill were enacted, up to 1.2 million restaurant and tipped workers would lose access to  Medicaid. But even the stand-alone No Tax on Tips Act would do far too little to better the lot of low-income workers, even tipped workers. 

It is no surprise that Senator Jacky Rosen, a Democrat from Nevada, a state where leisure and hospitality workers make up nearly one-quarter (23.1%) of its workforce, sponsored the Senate bill. But so too did right-wing ideologue Ted Cruz, a Republican Senator from Texas. That’s a dead giveaway that even the Senate bill remains more of a “politically expedient gimmick,” as the Economic Policy Institute has called the bill, than genuine reform. It provides senators with the political cover of appearing to provide substantial benefits to low-income workers. And it comes at a low cost, since the No Tax on Tips Act will fall short of providing the “real relief to hard-working Americans,” that Cruz promised.

No tax on tips proposals would exempt workers from paying federal income taxes on tips (whether cash or electronic). Both the House provision and the Senate bill applies to tipped workers with less than $160,000 of income. The Senate bill, which puts a $25,000 cap on exempt tip income, does more to exclude high-income taxpayers from the tips exemption. In addition, while the House provision expires at the end of 2028, the Senate bill would be permanent. Finally, the House bill requires tipped workers to have a Social Security number, which would exclude some immigrant workers from the tips tax break.

Despite those differences, the same basic problem persists with both no tax on tips measures. Some 37% of tipped workers have so little income that they already don’t pay federal income taxes, according to the Brookings Institution. All tipped workers, however, pay payroll taxes (e.g., Social Security and Medicare taxes) on their tip income.

Beyond that, no tax on tips would deliver precious little relief to taxpayers, and even less to low-income taxpayers. Just 2% of taxpayers would benefit from no federal income taxes on tips, as documented by the Tax Policy Center. That’s not much of a tax break for the poorest fifth of taxpayers. For taxpayers making less than $33,000 a year, their after-tax income would increase by $10 a year on average, or $450 a year if they are among the 1.4% of households in this group benefitting from the no tax on tips proposal, according to the same report by the Tax Policy Center.  

Had no tax on tips been expanded to exempt payroll taxes as well as income tax on tips, all tipped workers would have benefited. However, even then the benefits would have remained small, approximately twice the benefits from the income tax exemption by itself. Not paying Social Security taxes on tips could reduce future Social Security benefits for tipped workers.

Worse yet, no tax on tips could stand in the way of measures that would do far more to benefit tipped and other low-income workers. That would start with passing the Raise the Wage Act of 2025, which would raise the federal minimum wage to $17 an hour by 2030 and phase out the tipped minimum wage. That would more than double the current federal minimum wage, which remains unchanged since 2009 and is still stuck at $7.25 per hour, even though it has lost more than a third of its purchasing power. And the federal tipped minimum wage remains at a rock-bottom $2.13 per hour—its level in 1991. That was one-half of the federal minimum wage at the time. It’s down to 29% today.