For millions of workers, tips aren’t just a perk — they’re essential. Data show that about 4 million people in the United States, or one out of every forty workers, depend on tips to pay the rent and put food on the table.
However, the IRS taxes that money. If tips are part of your pay, the IRS treats every dollar you receive, whether left on the table in cash or added to a credit card receipt, as regular income. But some of that could soon change.
In a surprising move, the U.S. Senate just passed the “No Tax on Tips Act,” by a vote of 100-0; no senator on either side of the political aisle objected.
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If the bill becomes law, it could mean that millions of tipped workers get to keep more of what they earn, at least when it comes to cash tips.
Here’s more of what you need to know, beginning with how tips are currently taxed.
Are tips being taxed in 2025?
By law, you’re supposed to report all your tips to your employer if they total $20 or more in a single month. Your employer includes those tips in your paycheck calculations, withholding federal income tax, Social Security tax, and Medicare taxes, just like they do for your hourly wages.
When you file your tax return, your reported tips are included on your W-2 and added to your other income to determine how much you owe. Even if you get paid in literal cash, the IRS expects you to keep a record and report it.
So, currently, tips aren’t treated any differently than your regular paycheck when it comes to taxes.
No Tax on Tips Act unanimously passes the Senate
But...enter the No Tax on Tips Act. The bipartisan bill sponsored by Republican Sen.Ted Cruz of Texas passed the Senate by unanimous consent on May 20.
The measure, which the Peterson Foundation estimates could cost $110 billion over ten years, has roots in Donald Trump’s 2024 presidential campaign. You may remember that Trump frequently promised to end federal taxes on tips and overtime pay.
But it's also worth noting that Republicans aren’t the only ones who have called for ending taxes on tip income. Sen. Jacky Rosen (D-Nev.) has long called for making tips tax-free. Tip taxes are a key issue in Nevada because the state’s economy is primarily powered by its hospitality and service industries. More than 5% of all Nevada workers rely on tips as a key part of their income. That’s the highest percentage of tipped workers of any state, according to the Tax Policy Center.
“This bill will provide immediate financial assistance to numerous hardworking families,” Rosen stated in a release.
Meanwhile, in a statement, Sen. Cruz called the measure “a lasting impact on millions of Americans by protecting the hard-earned dollars of blue-collar workers.”
So, what is the Senate proposing? Here’s a quick summary.
A Big Deduction for Cash Tips: If you report your cash tips to your employer, you could deduct up to $25,000 of those tips from your taxable income.
Who’s Eligible? The deduction is meant for workers making up to $160,000 a year. That income limit would be adjusted for inflation.
Which Jobs Qualify: The bill targets jobs where tipping is standard — think servers, bartenders, hair stylists, and nail techs.
Employer Benefit: The bill also expands a tax credit for certain businesses, letting them claim credits for payroll taxes paid on tips, like restaurants do.
Note: If the No Tax on Tips Act is approved by the House and signed into law, the new tax deduction for cash tips would take effect for the 2025 tax year. That means workers could claim the deduction when they file their taxes in early 2026 for income earned in 2025. However, the bill has to pass the House and be signed by President Trump to become law.
What the No Tax on Tips bill wouldn’t do
Despite the excitement over this bill, there are some things the Senate bill doesn’t cover.
A key note is that this bill only applies to cash tips. Though, for IRS tax purposes, literal cash tips, credit card tips, and tips made through electronic payment methods like apps are traditionally treated the same. Non-cash tips are still considered taxable by the IRS but are not covered under this bill.
- Also, there’s no payroll tax break involved. That means you will still pay Social Security and Medicare taxes on your tips, even if you claim the income tax deduction.
- And…not everyone will benefit. About a third of tipped workers reportedly make so little they don’t owe federal income tax.
- Other workers, like cooks, dishwashers, or other behind-the-scenes staff who don’t usually receive tips, won’t receive a tax break under this bill either.
The bill will now head to the U.S. House of Representatives for consideration.
What about Trump’s One Big Beautiful bill in the House?
As Kiplinger reported and Rosen noted, Republicans in the House have been working on their big tax package, the “One Big, Beautiful Bill Act,” which contains provisions related to taxes on tips. (The House just passed that bill by a vote of 214-215, so it will now head to the Senate.)
- Both the House and Senate versions are structured as deductions, not full exclusions of tips from taxable income.
- So, workers would still report their tips and claim the deduction when filing their taxes, rather than having tips automatically excluded from taxable income.
- The deduction amount and income limit are the same as well.
So, you’re probably wondering: what’s the difference? A main difference is that the House tips proposal is wrapped in a much larger and more controversial bill that includes other tax cuts and political priorities.
Rosen emphasized the need for the Senate to pass the bill as a standalone measure without being tied to broader, partisan budget cuts. In remarks regarding the bill, Sen. Rosen said that working families should keep more of their earnings without risking essential benefits like Medicaid and SNAP food assistance.
Also, based on available information, the Senate’s No Tax on Tips Act doesn't seem to specify a temporary timeframe like the House GOP proposal does. The House version explicitly limits the deduction to tax years 2025 through 2028.
Was no tax on overtime approved?
The proposal to eliminate federal income tax on overtime pay, which was also a Trump campaign pledge, is a separate measure.
Several bills have been introduced, including the "No Tax On Overtime Act of 2025," which would exclude overtime pay from gross income for federal tax purposes. But, as of now, that bill has only been introduced and referred to committee. It hasn't been brought to the floor for a vote or passed.
The larger Republican tax agenda, which includes eliminating taxes on overtime and tips at least temporarily (through 2028 with income limits), just advanced ouf of the House as part of a complicated tax bill.
For more information, see What's Happening With Taxes on Overtime Pay?
Tax on tips: What this means for you
If you work a job where you receive cash tips, the Senate’s bill, if approved by the House and the President, could eventually mean more money in your pocket.
However, for those who already don’t earn enough to owe income tax, this new bill won’t have an impact.
Still, extra cash is welcome for many in the service industry. As the House takes up the bill, many tipped workers will be waiting to see what happens.
This article has been updated to clarify the tax treatment of cash tips.
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