Don't Mess With Taxes

The surprise move beat the House, which has a similar provision in its still pending One Big Beautiful Bill, to the tax relief punch.

Photo by RDNE Stock project

The House’s One Big Beautiful Bill (OBBB) does contain one of Donald J. Trump’s campaign trail tax promises. It provides tax relief for some workers who rely on tips to increase their income.

The Senate, however, decided it was tired of waiting for its counterpart on the other side of Capitol Hill to act on this issue. On Tuesday, May 20, Senators unanimously, and surprisingly, passed their own the No Tax on Tips Act.

The Senate's version would create a tax deduction worth up to $25,000 for tips, limited to cash gratuities that workers report to employers for withholding purposes on payroll taxes.

The deduction would be retroactive to the start of the 2025 tax year, meaning it could be claimed on next year’s tax returns.

It also would be restricted to employees who earn $160,000, but the income threshold would increase annually based on inflation.

The bill also calls for the Department of Treasury to issue a list of occupations that traditionally receive tips within 90 days of the bill’s enactment.

A similar version of tips tax relief is in the OBBB pending in the House. The House’s tax relief, however, is temporary.

The OBBB portion is scheduled to expire, conveniently for political and fiscal purposes, at the end of 2028, the last year of Trump’s second term.

Texas to Nevada to D.C. route: The No Tax on Tips Act was introduced in January by Texas’ junior Republican Sen. Ted Cruz. But it was a Nevada colleague from across the aisle who initiated yesterday’s Senate action.

Democratic Sen. Jacky Rosen, whose state is full of residents whose jobs depend on tips, brought the bill up in the Senate under unanimous consent. This process usually is used to speed routine, noncontroversial measures through the Senate.

When Rosen sought it Tuesday for the tip income bill, none of the other Senators on the floor objected. So, the bill is now on its way to the House.

Bipartisan support of an old idea: Under current law, workers who receive cash tips of $20 or more in a month must report those amounts to their employers. (Shameless plug: note the regular reminder in the ol’ blog’s monthly tax moves in the right column.)

This taxable tip income includes not only the money paid specifically to servers by customers, but also pooled tip-sharing amounts doled out by employers.

After Trump’s comments last summer at a Las Vegas campaign stop, ways to exempt tips from taxes gained traction.

Democrats joined Republicans in introducing bills. Even Trump’s Democratic opponent, Vice President Kamala Harris, expressed support for a version of the tax code change.

The idea is not new. Tax-free tips has been floated before. Libertarian-leaning Ron Paul, a former GOP U.S. Representative from Texas and father of current Kentucky GOP Sen. Rand Paul, proposed the same tax break during his unsuccessful 2012 bid for the GOP presidential nomination.

But apparently, the tax break’s time finally has come.

"Nevada has more tipped workers per capita than any other state. So this bill would mean immediate financial relief for countless hard-working families," Rosen said. As for its genesis in the opposition party, Rosen added, “I am not afraid to embrace a good idea, wherever it comes from."

Rosen and Catherine Cortez Masto, the Silver State’s other Senator and also a Democrat, were among the bipartisan supporters of the bill. That’s one reason Cruz’s bill cleared the chamber so easily. It also had the support of several national trade organizations in industries where workers regularly receiver tips.

Concerns from labor groups, deficit hawks: Labor advocates, however, as well as tax policy experts oppose the measure.

One of the concerns is that employers might reclassify wages as tips. This could affect minimum wage considerations, as well as worker benefits.

Federal law says an employer of a tipped employee, who is described as someone who regularly receives more than $30 per month in tips, generally is only required to pay $2.13 per hour in direct wages if that amount plus the worker’s tips at least equals the federal minimum wage.

The federal minimum wage is $7.25 per hour, a rate it’s been tuck at since July 2009. Some states have enacted higher minimum wages.

There’s also the issue of the cost of taking a chunk of earnings off the tax table. Republican deficit hawks already are fighting with their party colleagues over how much the full OBBB would add to Uncle Sam’s federal debt.

The tips deduction provision is a relatively small amount of money, between $150 billion to $250 billion over the next decade by one estimate, when you consider, per the Joint Committee on Taxation's fiscal analysis, that the 1,116-page bill would add more than $5 trillion to the federal deficit.

But still, Republican leaders are still looking for anything that could sway members of their party who are hesitant to vote for the comprehensive bill.

House options: While Trump is adamant about tax provisions be consolidated into the One Big Beautiful Bill, the no taxes on tips section could be dropped from the contentious measure that has GOP Representatives fighting among themselves.

But it’s unclear whether losing that provision would be enough to satisfy any of the OBBB Republican opponents. 

If it is removed, the House then would need to take up the No Tax on Tips Act as a freestanding piece of legislation. It’s similarly unclear whether it would pass as quickly as a solo bill as it did in the Senate.

Or, to make 47 happy, House Republican leaders could just merge the Senate and OBBB no tax on tips components into the single bill. But the Senate version actually would cost more, which adds to, rather than reduces, a key problem already facing the consolidated House bill.

Whichever legislative route is taken, supporters of changes to the tax treatment of tips are confident.

“Whether it passes free-standing or as part of the bigger bill, one way or another, no tax on tips is going to become law and give real relief to hard-working Americans,” said Cruz from the Senate floor on Tuesday.

You also might find these items of interest:

• Tip income trips up Yankees' traveling secretary
• Reporting holiday and year-round taxable tip income
• Tax-free tips might not actually help intended workers, and could increase the U.S. deficit

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