How the No Tax on Tips law would work

Time - The No Tax on Tips Act would revise the IRS Code to eliminate the income tax on tips. 

Employees who “traditionally and customarily received tips on or before December 31, 2023,” would therefore be exempt from paying taxes for up to $25,000 earned tip income. That includes waiters, bartenders, and delivery drivers. Beauty service workers—such as barbers, estheticians, and nail technicians—would also benefit, though the full list of eligible occupations would only be listed by the U.S. Treasury Secretary 90 days after the bill's passage.

To qualify for the tax deduction, employees must have earned less than $160,000 for the 2024-2025 tax year. Should the bill become law, this income qualification will be adjusted for inflation.

The exemption would impact only a small fraction of the country’s workforce. The Yale Budget Lab estimates that some 4 million people worked in tipped occupations in the U.S. in 2023, representing about 2.5% of all U.S. workers. Others, such as the Economic Policy Institute (EPI), estimate tipped workers to make up a slightly higher percentage of about 5%

And despite the proposal’s broad appeal, economists say that curtailing taxes on tips may harm workers in the service industry. Already, 37% percent of tipped workers do not pay federal income tax because they earn so little. Experts fear that the new policy would incentivize employers to keep base wages stagnant. The tax change may also affect their eligibility for other programs, such as the child tax credit and earned income tax credit, or reduce their contributions to Social Security. 

The No Tax on Tips Act could further impact the nature of tipping culture in the U.S. Experts warn businesses could potentially encourage tipping requests, or make them mandatory, in order to pay their workers less. Research shows that 72% of Americans already feel they are being asked to tip workers more frequently, per a Pew Research Center report.