TIPS Act
- Sponsor
- Rep. Horsford, Steven [D-NV-4]
- Committees
- Education and Workforce Committee (primary)
- Last action
- Feb 13, 2025
Bottom line
The TIPS Act aims to increase wage stability for tipped workers by mandating the full minimum wage and offers a tax deduction for cash tips, while potentially increasing labor costs for businesses and impacting federal revenue.
What it actually does
This bill eliminates the subminimum wage for tipped employees under the Fair Labor Standards Act, requiring employers to pay them the full federal minimum wage before tips. It also creates a new federal income tax deduction for qualified cash tips received by individuals with adjusted gross incomes below $112,500, applicable to traditionally tipped occupations. The bill clarifies that employees retain all tips, allowing for tip pooling among customarily tipped workers.
Proponents argue
Proponents argue that eliminating the subminimum wage for tipped employees provides a stable, predictable income floor, reducing reliance on fluctuating tips and addressing wage inequality. They contend that this change will improve economic security for millions of workers, particularly women and people of color who are disproportionately represented in tipped occupations. The tax deduction for cash tips is seen as a way to provide additional financial relief to lower and middle-income tipped workers and potentially encourage more accurate tip reporting.
Opponents contend
Opponents typically argue that mandating the full minimum wage for tipped employees will significantly increase labor costs for restaurants and other service businesses, potentially leading to job losses, reduced hours, or higher consumer prices. They suggest that the current tip credit system allows businesses flexibility and that many tipped workers already earn well above the minimum wage when tips are included. Critics may also raise concerns about the complexity of the new tax deduction and its potential impact on federal revenue.
The bill is concise and its core provisions are clearly stated, making it accessible for a reader to understand its primary impacts within a short timeframe.
Section 2(a)
Elimination of Subminimum Wage for Tipped Employees
This provision amends the Fair Labor Standards Act of 1938 to require that employers pay tipped employees the full federal minimum wage, as set forth in section 6(a)(1) of the FLSA. This eliminates the current 'tip credit' system, where employers can pay a lower direct wage if tips make up the difference to meet the minimum wage. All tips received by an employee must be retained by that employee.
Supporters argue
Supporters argue that this change ensures a living wage floor for tipped workers, reducing their vulnerability to fluctuating tip income and providing greater economic security. They contend it helps address historical inequities and wage theft, as employers can no longer rely on tips to meet minimum wage obligations.
Critics contend
Critics contend that eliminating the tip credit will drastically increase operational costs for businesses, particularly small businesses, potentially leading to reduced staffing, fewer hours for employees, or even business closures. They argue that many tipped workers already earn well above the minimum wage with tips and prefer the current system.
Tradeoffs
The provision balances the goal of providing a stable, higher base wage for workers against the potential for increased operational burdens on businesses, which may lead to job impacts or higher consumer prices.
Section 2(a)
Clarification on Tip Retention and Pooling
This part of the amendment explicitly states that all tips received by a tipped employee shall be retained by that employee. It also clarifies that this rule does not prohibit the pooling of tips among employees who customarily and regularly receive tips, such as servers, bussers, and bartenders.
Section 2(b)
Adjusted Penalties for Unlawful Tip Practices
This section amends the penalty provisions of the Fair Labor Standards Act (Section 16(b) and (c)). It removes references to 'tip credit taken by the employer' and replaces them with 'all such tips unlawfully used or kept by the employer.' This change reflects the elimination of the tip credit system, ensuring that penalties for misusing or withholding tips remain applicable and clear under the new wage structure.
Section 3
New Income Tax Deduction for Qualified Cash Tips
This section establishes a new deduction in the Internal Revenue Code for individuals who receive qualified cash tips. Taxpayers can deduct the amount of qualified tips reported to their employer, provided their adjusted gross income (AGI) does not exceed $112,500. Qualified tips are defined as those from an unrelated party, where the individual has no ownership stake in the business, and received in traditionally tipped occupations like cosmetology, hospitality, and food service.
These subsections make technical amendments to the Internal Revenue Code (Sections 63(b), 67(b), and 68(c)) to ensure that the new deduction for cash tips can be taken by non-itemizers and is not subject to certain limitations that apply to miscellaneous itemized deductions or overall itemized deduction limitations.
Section 3(b) and 3(c)
Why it matters:This is standard legislative practice to ensure a new tax provision integrates correctly with existing tax law and functions as intended, rather than being evasive.
Case for: Supporters argue these amendments are crucial to ensure the tip deduction is broadly accessible to eligible tipped workers, regardless of whether they itemize, and that its value is not diminished by other tax code limitations.
Case against: No specific opposition is typically raised against these technical conforming amendments, as they are designed to ensure the proper functioning of the primary deduction.
Estimated impact: These provisions ensure the full intended fiscal impact of the cash tip deduction is realized for eligible taxpayers.
The bill defines 'qualified tips' for the purpose of the new tax deduction, specifying that they must be from an unrelated party, the individual cannot have an ownership stake in the business, and they must be received in traditionally tipped occupations. It lists examples such as cosmetology, hospitality, food and beverage service, parking attendants, and custodial service.
Section 3(a)(1), new IRC Section 224(c)
Why it matters:This level of detail is necessary for clarity and to prevent unintended application of the tax deduction, a standard practice in tax legislation.
Case for: Proponents argue that these definitions are essential to target the tax deduction effectively to the intended beneficiaries and prevent abuse, ensuring it applies to genuine tipped workers.
Case against: Critics might argue that the specific list of occupations could be too narrow or too broad, potentially excluding some deserving workers or including others not typically considered. The ownership stake clause could also be seen as overly restrictive.
Estimated impact: These definitions directly shape the scope and cost of the new tax deduction, determining who is eligible for the benefit.