TIP Improvement Act of 2026
- Sponsor
- Rep. Horsford, Steven [D-NV-4]
- Committees
- Education and Workforce Committee (primary)
- Last action
- Feb 13, 2026
Bottom line
The bill aims to increase the base pay and tax benefits for tipped workers while introducing new rules for tip deductions and automatic gratuities.
What it actually does
This bill significantly alters the compensation structure for tipped employees by requiring employers to pay them the full federal minimum wage, eliminating the 'tip credit' system. It also expands and makes permanent a tax deduction for qualified tips, increasing the deduction limit for joint filers, adding anti-fraud measures, and explicitly including automatic gratuities for certain professions as qualified tips.
Proponents argue
Proponents argue that eliminating the sub-minimum wage for tipped workers ensures a stable and predictable income floor, reducing their reliance on tips and protecting them from wage theft. They contend that expanding and making the tip deduction permanent provides much-needed tax relief for these workers, especially those in hospitality, food service, and cosmetology, and clarifies the treatment of automatic gratuities.
Opponents contend
Opponents might argue that eliminating the tip credit would significantly increase labor costs for businesses, particularly in the restaurant and hospitality sectors, potentially leading to job losses, reduced hours, or increased prices for consumers. They may also express concerns about the administrative burden of new tax rules and the potential for changes in tipping culture to negatively impact overall earnings for some highly-tipped workers.
The bill is relatively short and its core provisions are understandable, but the implications of the FLSA and IRC amendments require careful consideration beyond a quick read.
Section 2(a)
Elimination of Tipped Minimum Wage (Tip Credit)
This provision amends the Fair Labor Standards Act (FLSA) to require that tipped employees be paid the full federal minimum wage, as set forth in section 6(a)(1) of the FLSA. Currently, employers can pay tipped employees a lower direct wage (the 'tipped minimum wage') and use a 'tip credit' to make up the difference to the federal minimum wage. This amendment eliminates the employer's ability to take a tip credit, meaning employers must pay tipped employees the standard federal minimum wage directly. Employees would still retain all tips, with tip pooling among customarily tipped employees remaining permissible.
Supporters argue
Supporters argue this provision provides economic security and dignity for tipped workers, ensuring they are not solely reliant on customer generosity and protecting them from wage theft. It establishes a consistent wage floor, reducing poverty and income instability.
Critics contend
Critics contend that this change will drastically increase operational costs for businesses, potentially leading to reduced staffing, higher consumer prices, or even business closures. They argue it could disrupt established tipping models and potentially reduce overall earnings for highly-tipped workers if customers adjust their tipping habits.
Tradeoffs
The provision balances the goal of increasing worker wages and stability against concerns about increased business costs and potential impacts on employment and consumer prices.
Section 2(b)
Enhanced Penalties for Unlawful Tip Handling
This section amends the penalty provisions of the Fair Labor Standards Act (FLSA) to clarify and strengthen the remedies for employers who unlawfully use or keep employee tips. Previously, penalties were based on 'any tip credit taken by the employer and all such tips unlawfully kept.' The amendment removes the 'tip credit taken' language, focusing solely on 'all such tips unlawfully used or kept by the employer,' ensuring that employers are penalized for any misuse of tips, regardless of whether they took a tip credit.
Section 3(a)
Increased Qualified Tip Deduction Limit for Joint Returns
This provision amends Section 224(b)(1) of the Internal Revenue Code of 1986 to increase the limit for the qualified tip deduction for individuals filing a joint tax return. The existing deduction limit is $25,000. This amendment doubles that amount to $50,000 for taxpayers who file jointly, allowing married couples who both earn qualified tips to deduct a larger combined amount from their taxable income.
Section 3(b)
Prevention of Waste, Fraud, and Abuse in Tip Deduction
This section adds new criteria to Section 224(d)(2) of the Internal Revenue Code to prevent abuse of the qualified tip deduction. It specifies that a tip will not qualify for the deduction if it is paid by a person who bears a relationship to the employee described in section 267(b) (e.g., family members, controlled corporations) or if the employee has an ownership stake in the business that employs them in the job for which they receive the tip. These measures aim to prevent individuals from artificially generating deductions through related-party transactions or by tipping themselves in their own businesses.
Section 3(d)
Automatic Gratuities as Qualified Tips for Certain Professions
This provision adds a new paragraph to Section 224(d) of the Internal Revenue Code, explicitly defining 'automatic gratuity' as a 'qualified tip' for individuals in hospitality, food and beverage service, or cosmetology. An automatic gratuity is defined as a mandatory or suggested amount paid pursuant to an employer's uniform policy, where the entire amount is received by the individual or pooled and received only by employees under a tip-sharing arrangement. This clarifies that these amounts, which might not otherwise be considered 'tips' under traditional IRS guidance (e.g., if mandatory), are eligible for the tax deduction.
Section 3(e)
Qualified Tip Deduction Made Permanent
This section amends Section 224 of the Internal Revenue Code by striking subsection (h), which typically contains a sunset provision for temporary tax deductions. By removing this subsection, the qualified tip deduction, along with all its amended provisions, is made permanent, ensuring its continued availability for taxpayers in future taxable years without needing reauthorization.
These subparagraphs introduce new conditions for a tip to be considered 'qualified' for the tax deduction, specifically excluding tips from related parties (as defined by IRC Section 267(b)) and tips received by an individual with an ownership stake in the employing business.
Section 3(b)(1)-(3)
Why it matters:This is standard legislative practice for anti-abuse provisions, which often rely on existing definitions and technical exclusions to prevent circumvention of the law. It's not necessarily evasive but requires careful reading.
Case for: The case for these provisions is to prevent individuals from manipulating the tax deduction by creating artificial tip income through related-party transactions or by tipping themselves in businesses they own. This ensures the deduction is used as intended for genuine tipped income.
Case against: While generally supported as anti-fraud measures, some might argue that the ownership stake provision could inadvertently penalize legitimate small business owners who also work in tipped roles (e.g., a salon owner who also styles hair and receives tips), if not carefully applied. However, this is a minor concern compared to the anti-fraud benefits.
Estimated impact: Prevents an unknown but potentially significant amount of fraudulent tax deductions, protecting federal tax revenue.
This section defines 'automatic gratuity' and explicitly includes it as a 'qualified tip' for individuals in hospitality, food and beverage service, or cosmetology, provided it's a mandatory/suggested amount under employer policy and fully received by employees (or pooled among them).
Section 3(d)(4)(A) and (B)
Why it matters:This is a technical definition necessary to clarify the scope of the tax deduction. The detail is important for precise legal application and is standard for tax code amendments.
Case for: This provision provides crucial clarity for a significant portion of the service industry, ensuring that earnings from automatic gratuities are treated consistently for tax deduction purposes, thereby offering equitable tax benefits to workers in these professions.
Case against: Some might argue that explicitly including automatic gratuities as 'qualified tips' could complicate the distinction between wages and tips, potentially impacting other labor law interpretations or encouraging employers to shift towards mandatory service charges, which some workers may view differently than voluntary tips.
Estimated impact: Clarifies the tax treatment for potentially billions of dollars in automatic gratuities annually, impacting the tax liability of numerous service workers.