Technical corrections only. The engrossed version (v2) reflects the bill's passage in the Senate, updating its legislative status from 'Introduced' to 'Engrossed' and removing sponsor information. No substantive policy changes were made to the text of the bill.
No Tax on Tips Act
- Sponsor
- Sen. Cruz, Ted [R-TX]
- Committees
- Finance Committee (primary)
- Last action
- May 26, 2025
Bottom line
The bill provides significant federal income tax relief for tipped workers and expands a tax credit for beauty service employers, aiming to reduce the tax burden on service industry employees and businesses.
What it actually does
This bill creates a new federal income tax deduction for qualified tips received by individuals, capped at $25,000 per year. It also expands an existing employer social security tax credit for tips to include beauty service establishments and updates how that credit is calculated for the newly included businesses. The deduction is available to all individual taxpayers, including those who do not itemize.
Proponents argue
Supporters argue that this bill provides essential tax relief to hardworking tipped employees, many of whom are low-to-middle income, directly increasing their take-home pay. They also contend that expanding the employer tip credit to beauty services creates parity with the food and beverage industry, supporting small businesses and their employees.
Opponents contend
Opponents might argue that the bill creates a significant loss in federal revenue, potentially contributing to the national debt, and could be seen as an unfair tax carve-out for specific industries and workers, rather than a broader, more equitable tax reform.
The bill is concise and clearly structured, making it accessible for an informed reader to evaluate its provisions quickly.
Section 2(a)
New Income Tax Deduction for Qualified Tips
This provision amends the Internal Revenue Code to allow individual taxpayers to deduct qualified tips received during the taxable year, up to a maximum of $25,000. Qualified tips are defined as cash tips received in occupations that traditionally and customarily received tips on or before December 31, 2023, as determined by the Secretary of the Treasury. It specifically excludes tips received by employees whose compensation from that employer in the preceding year exceeded a certain high-compensation threshold.
Supporters argue
Supporters argue this deduction provides direct and meaningful financial relief to service workers, many of whom rely heavily on tips and face economic pressures. It could also incentivize more accurate tip reporting by removing the tax disincentive.
Critics contend
Critics might contend that this creates an inequitable tax advantage for tipped workers over other low-wage employees and could lead to substantial federal revenue losses without a clear offset.
Tradeoffs
The provision balances providing targeted tax relief to a specific segment of the workforce against the broader implications for federal revenue and tax equity across different employment types.
Section 2(b)
Deduction Available to Non-Itemizers
This section amends the Internal Revenue Code to ensure that the new deduction for qualified tips is allowed in computing adjusted gross income. This means that taxpayers do not need to itemize their deductions to claim the tip deduction, making it accessible to a much broader range of individuals, including those who take the standard deduction.
Section 2(d)
Modification of Tax Withholding Procedures
This provision directs the Secretary of the Treasury to modify the tables and procedures for income tax withholding to account for the new qualified tips deduction. This means that eligible tipped employees will have less federal income tax withheld from their paychecks throughout the year, resulting in higher take-home pay.
Section 3(a)
Extension of Employer Tip Credit to Beauty Service Establishments
This provision expands the existing employer social security tax credit for tips (Section 45B of the IRC) to include tips received by employees providing 'beauty services.' Beauty services are specifically defined to include barbering, hair care, nail care, esthetics, and body and spa treatments. This means employers in these sectors can now claim a tax credit for a portion of the social security taxes they pay on their employees' tips.
Section 3(b)
Employer Tip Credit Calculation Based on Current Minimum Wage
This provision modifies how the employer social security tip credit is calculated. For beauty service establishments (and any future additions), the credit will now be determined with respect to the current federal minimum wage, rather than the outdated minimum wage rate that was in effect on January 1, 2007. The 2007 rate will still apply to food or beverage establishments.
The deduction for qualified tips does not apply to individuals who, in the preceding taxable year, had compensation (as defined by section 414(q)(4)) from that employer exceeding the amount in effect under section 414(q)(1)(B)(i). This effectively limits the deduction to non-highly compensated employees.
Section 2(a)(1), new IRC Section 224(c)(2)
Why it matters:This is standard legislative practice for referencing existing tax code definitions to avoid redundancy and maintain consistency, rather than being intentionally evasive.
Case for: This exclusion ensures that the tax benefit is targeted towards lower and middle-income tipped workers, aligning with the likely intent of providing relief to those who need it most, rather than high-earning individuals.
Case against: Some might argue that this adds complexity to the deduction and could potentially exclude some workers who still rely significantly on tips but might cross this technical threshold due to high volume or specific roles.
Estimated impact: This provision narrows the scope of beneficiaries for the tip deduction, potentially reducing the overall revenue impact compared to a universal deduction for all tipped workers.
The Secretary of the Treasury is mandated to publish a list of occupations which traditionally and customarily received tips on or before December 31, 2023, within 90 days of the Act's enactment. This list will define which occupations are eligible for the 'qualified tip' deduction.
Section 2(a)(2)
Why it matters:This is a standard administrative directive following a new statutory definition, ensuring clarity and implementation guidance for the new law.
Case for: This mandate provides crucial clarity and certainty for both taxpayers and the IRS regarding eligible occupations, preventing ambiguity and potential disputes over who qualifies for the deduction.
Case against: Critics might argue that this process could lead to disputes over which occupations are included or excluded, potentially leaving some deserving workers out if the list is too narrow or slow to be updated, or creating lobbying pressure from various industries.
Estimated impact: This provision is crucial for the practical application and scope of the deduction, as it will directly determine the universe of eligible tipped occupations.
The amendments made by this Act, including the new tip deduction and the expanded employer tip credit, shall apply to taxable years beginning after December 31, 2024.
Section 2(e) and Section 3(c)
Why it matters:This is standard legislative practice for specifying when new laws take effect, providing lead time for implementation and taxpayer adjustments.
Case for: This effective date provides necessary lead time for the IRS to implement the required changes, such as modifying withholding tables and issuing guidance, and for taxpayers to adjust their financial planning accordingly.
Case against: Some might argue that delaying the effective date by over a year from the bill's potential enactment delays the financial benefits to taxpayers and businesses who might prefer immediate relief.
Estimated impact: This provision delays the fiscal impact (both revenue loss and taxpayer benefits) of the bill by over a year from its potential enactment, meaning the first effects will be seen in the 2025 tax year (filed in 2026).