On May 20, 2025, the U.S. Senate passed the “No Tax on Tips Act” with unanimous consent. The bill now heads to the U.S. House of Representatives.

If passed, the “No Tax on Tips Act” would allow employees in tipped occupations to claim a 100% federal income tax deduction for cash tips received up to $25,000 each year. Accordingly, for example, if a bartender earned $70,000 in a given year and $25,000 of that income came from cash tips, he or she would be taxed on $45,000 of income instead of $70,000 when it came to paying federal income tax.

The proposed legislation refers to this deduction applying to “cash tips.” In the tax code and in this legislation, the term “cash tip” applies to tips given in bills and coins, on a credit or debit card, or via the business’s electronic payment system. It has not yet been determined whether tips that go directly to a server via a service like Venmo or PayPal would qualify as cash; however, traditionally, these types of tips are treated as cash by the IRS. Service charges, which are legal in some places, are added by the business and do not count as tips.

Importantly, the income would still be reported for tax purposes and employers would still be subject to payroll taxes (such as Social Security and Medicare) on these reported tips. Employer should also continue their reporting obligations pursuant to federal, state, and local law.

Who is excluded? “Highly compensated employees” (for 2025, those who earn over $160,000) are excluded. This amount will be adjusted for inflation.

Will this bill affect state and local income taxes? Currently, the bill as written does not include language affecting state and local income tax; however, the final version of the bill is yet to be determined.

Lastly, the bill expands the business tax credit for the portion of payroll taxes that an employer pays on certain tips to include payroll taxes paid on tips received in connection with certain beauty services such as barbering and hair care, nail care, esthetics, body and spa treatments.

If approved by the House of Representatives and signed by the President, the bill would become law. The effective date of the law, if passed, is still to be determined. If signed into law, the Secretary of the Treasury is required to publish a list of qualifying occupations within 90 days.

Stokes Wagner will continue to monitor updates and will provide additional updates as they become available. If you have any questions, do not hesitate to contact a Stokes Wagner attorney.

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