No Tax on Tips Finds Congressional Support, but Leaves Questions

While on the campaign trail, President Donald Trump made clear his desire for no federal income tax on tips and overtime pay, and in recent days has reiterated that goal. The proposal forms the focal point of the president’s tax policy agenda, which aims to improve the livelihoods of blue-collar and service workers across the U.S. Notably, the concept has garnered bipartisan support; on the campaign trail, former Vice President Kamala Harris also voiced her support for no tax on tips. Congress has recently been debating two bills that address these policies, one in the Senate and the other in the House of Representatives.  

Despite interest from both sides of the aisle, debate over the effectiveness of such a change in tax policy remains. 

On the State Level 

In 2023, Alabama passed an income tax exemption on tips and overtime pay as part of the state’s response to the struggling post-pandemic labor market. Data has since indicated that the exemption resulted in increased personal earnings and labor supply. Other states, including Kentucky and North Carolina, are now considering similar bills in the hope of increasing consumption and, in turn, encouraging job creation.  

U.S. residents have expressed significant bipartisan support for such exemptions. According to a 2023 Ipsos poll, about 73% support no taxes on tips. This support is perhaps reflective of a national desire to see workers in tip-based jobs keep more of their earnings.  

House and Senate Bills

As tipping culture in the U.S. becomes ever more visible, the question of workers’ reliance on tips as income has gained political traction. Trump has not elaborated on his proposed policy, but two congressmen have offered potential solutions.  

Sen. Ted Cruz, R-Texas, has backed the No Tax on Tips Act, which would create a deduction for tip income for lower-wage employees — including waitstaff, bartenders, and delivery drivers. Rep. Steven Horsford, D-Nev., has proposed a similar bill in the House, which would likewise get rid of income taxes on tips but also abolish the subminimum wage for tipped workers as an extra employment protection.

“The Senate version of the bill allows for a deduction of cash tip wages from gross income,” explained Ariel Cudkowicz, an attorney at Seyfarth in Boston. By eliminating the subminimum wage, the House’s bill would ensure “all tip workers would have to be paid the federal minimum wage. The tip deduction would be from gross income.”

Though the bills suggest bipartisan support for untaxed tips, they received a deluge of criticism since their introduction earlier in the year. It is a “perfectly worthwhile policy objective,” Cudkowicz said, but because it is still “very early in the process,” there is a lot of work to be done to ensure the legislation’s efficacy and feasibility.  

Despite the criticism, the Senate bill was passed on May 20 in a vote that garnered unexpected bipartisan support.  

Two days later, the House Ways and Means Committee passed its tax bill, which introduced a limited version of the same proposal. Specifically, it indicated that the tax exemption would apply only to “occupation(s) which traditionally and customarily received tips before December 31, 2024.” However, it remains unclear what occupations this category includes. 

Potential Issues 

“The legislation as written doesn’t reflect the modern reality of how tips are exchanged,” Cudkowicz said. Both bills refer to cash tips as being exempt from income tax, though “cash tips are a dying way” of compensating workers, Cudkowicz noted. This raises the question of what qualifies as cash and if the legislation will extend to digital methods of tipping. 

The legislation in no way absolves employers of their reporting obligations.  

“Employers would still need to track tips” under both bills, according to Cudkowicz. The legislation “does not simplify the information employers need for payroll or the obligations they have under wage and hour laws to keep track of tip income data,” he said. People still need to make the minimum wage, he explained, so employers would need to track workers’ tips to ensure they cross that income threshold.  

It also remains unclear what workers, specifically, would benefit from the legislation. “A lot of tipped employees who work in restaurants don’t make enough to pay federal income tax,” Cudkowicz said. “So, these proposals don’t really help them."