Proposed Legislative Changes: No Tax on Tips for Tipped Workers
In a move to benefit tipped employees, Congress is currently discussing legislation that aims to exempt gratuities from federal income taxes. This proposal has gained traction following bipartisan support and could make a significant impact on the livelihoods of waiters, delivery drivers, and diners across the United States.
Legislation Details
On May 21, 2025, the Senate passed the No Tax on Tips Act with unanimous support. This legislation follows a commitment made by both President Trump and former Vice President Kamala Harris during last year’s presidential campaign. The proposed tax break is set to be included in the "One, Big, Beautiful" budget bill, which is being negotiated by House Republicans. If approved, the changes would be effective from 2026 through 2028. ## Current Taxation of Tips
Under the existing federal tax code, all tips must be reported as income by employees. This applies regardless of the method used to provide the tip, whether it’s cash, credit or debit cards, or electronic payments. Tipped workers, which include servers, bartenders, and delivery drivers, must track and report every cent received. This requirement remains even if the tips are pooled and redistributed among staff.
What Constitutes a Tip?
In the context of the tax code and proposed legislation, a "cash tip" includes any gratuity handed over in cash, charged to a card, or processed through an electronic payment system. However, there is ongoing uncertainty regarding tips sent directly to workers through peer-to-peer services, such as Venmo or PayPal. It is also important to distinguish between tips and service charges, the latter of which do not count as gratuities and are imposed directly by the business.
Proposed Changes to Tax Reporting
The new legislation aims to simplify the reporting process for tipped workers by exempting their tip income from federal income taxes. In practice, this means that the amount received in tips would be listed as an “above-the-line” deduction on tax returns. While this would lower the overall tax liability, impacted workers would still need to track and report their earnings accurately.
Who Would Benefit?
The proposed changes apply broadly to all tipped workers in the restaurant industry, which includes servers and baristas, as well as food delivery drivers. Government data indicates that there are over two million tipped workers in the U.S., signaling a significant population that could benefit from these legislative changes.
As these proposals move through Congress, the final details and definitions of the legislation remain to be clarified. The impact of these changes on employees and diners alike will emerge as the discussions progress, shaping the financial landscape for millions of Americans involved in the service industry.
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