The United States Senate unanimously passed the “No Tax on Tips Act” on Tuesday, May 20th, advancing a major tax reform proposal promised by President Trump’s campaign. If the bill ultimately passes the House of Representatives and is signed into law by the president, it will allow workers with annual incomes of less than $160,000 to exempt up to $25,000 in cash tips from federal income tax, social security tax, and federal Medicare tax.
Introduced by Republican Senator Ted Cruz from Texas, the bill has received bipartisan support, with Democratic Senators Jacky Rosen and Catherine Cortez Masto from Nevada among those pushing for it. Rosen emphasized that the purpose of the bill is to “cut taxes for hardworking Americans, not just the wealthy.”
In response to this policy, Los Angeles-based senior accountant Xinjie Liu stated that if the bill takes effect, it will bring significant tax benefits to employees in the food and beverage, delivery, beauty, and hairdressing industries. “Based on the estimated cap of $25,000, an employee could save approximately $1,900 in taxes, and employers can also reduce their expenses simultaneously, reducing stress for both parties.”
However, she also pointed out that the actual beneficiaries will still be limited by individual income situations, as most entry-level employees may not reach the maximum limit of tip income, resulting in limited actual tax relief.
Additionally, Liu reminded that this policy could lead to various implementation concerns. For example, some employees in non-tipping positions may try to adjust their responsibilities to incorporate tip-based nature, blurring the line between job titles and job duties. At the same time, there may be cases of excessive reporting of cash tips to claim tax-exempt status.
Because credit card tips have electronic records, they are more easily audited, but the cash portion has always been a gray area in taxation. Liu believes that the new law could prompt some workers to start reporting previously unreported tips to claim tax deduction space, making the tax filing process more complicated.
Liu said that employers’ tax filings and employees’ tip reporting need to be consistent, as inconsistency could lead to risks of undergoing commercial revenue investigations if audited. She recommended that service industry practitioners develop a habit of daily recording tip income, especially keeping detailed records of cash tips for future audits.
According to the draft content, this tax exemption is limited to tips reported by workers to employers and included in payroll tax withholding, with adjustments expected to be made in line with inflation. It is anticipated that this bill may be included in Trump’s proposal to extend tax cuts as part of the overall tax reform plan for further deliberation and voting by the House of Representatives.
Furthermore, this legislation may also affect consumer psychology in giving tips. Some people believe that since service personnel have already enjoyed tax-free advantages on their income, it may reduce the willingness to give tips. The bill has already passed the Senate and still needs to be voted on by the House of Representatives to become law officially, and there are uncertainties in its future development.