This bill is popular among workers, especially those who work in hospitality, but just like the overtime deduction, it isn’t technically a true tax cut but a targeted deduction that favors some groups over others.
Senator Ted Cruz of Texas, who introduced the bill along with Senator Jacky Rosen of Nevada, said, “This is about fairness. These workers are putting in long hours and living paycheck to paycheck. They deserve to keep more of what they earn.”
Senator Rosen emphasized that service workers in tourism-heavy economies like Nevada are the “backbone of the economy,” and that the bill offers them “the respect and support they deserve.”
The No Tax on Tips Act proposes amending the federal tax code to make tip income exempt from federal income taxes. Under current law, tipped workers must report their tips as income, and employers are required to withhold taxes. If the bill becomes law then tips from customers would still need to be reported but they would no longer be taxed at the federal level. The change applied to tips only and excludes wages and employer-paid bonuses.
The deduction excludes automatic service fees, such as mandatory 20% tips for large parties. It also doesn’t apply to anyone in Specified Service Trades or Businesses (SSTBs), which covers professions like law and finance where skill is the main asset.
According to supporters of the bill, it eases burdens on small businesses and increases take-home pay for workers.