The short answer? It’s not finalized yet — and even when it happens, it probably won’t be in the way most people assume. While federal proposals have advanced in both the House and Senate to change how tip income is taxed, these bills are still in negotiation, and the details vary dramatically.
The bigger story: What began as a focused idea to exempt tips from federal income tax has become entangled in a much broader legislative agenda. The result? Two different bills, partisan leverage plays, and no final law—yet.
How We Got Here: From Talking Point to Competing Bills
Calls to stop taxing tips have circulated in political circles for years. But momentum surged in early 2024 when former President Donald Trump announced support for eliminating federal income tax on tips. Shortly after, Republican lawmakers introduced proposals in both chambers of Congress to make that idea reality.
The House version came first, bundled into a broader omnibus bill nicknamed the “One Big Beautiful Bill,” which pairs tax relief with a range of other Republican priorities — including immigration enforcement, overtime tax deductions, and regulatory rollbacks.
The Senate responded by advancing a more narrowly tailored bill focused solely on tip income. Surprisingly, that bill passed unanimously in May 2025, drawing widespread attention due to its bipartisan vote and its break from the more complex House version.
What the Bills Propose
Senate Bill: The No Tax on Tips Act (S.129)
- Provides a federal income tax deduction of up to $25,000 on reported cash tips.
- Applies only to workers in Treasury-approved occupations (to be defined within 90 days of enactment).
- Does not affect payroll taxes like Social Security or Medicare.
- Includes a $160,200 income cap to limit eligibility. (NBC News)
House Bill: Part of H.R.1, “One Big Beautiful Bill”
- Offers deductions on both tip income and overtime wages, rather than outright exemptions.
- Overtime deduction applies through 2028 under Section 110102.
- Targets the same $160,000 income threshold but has broader reach.
- Part of a sweeping budget reconciliation package that also addresses immigration, energy, and federal spending caps.
(Jackson Lewis, Kiplinger)
Both bills require tips to be formally reported — a key IRS safeguard — and delegate the final definitions of “qualifying occupations” to the Treasury Department.
Why There’s No Law Yet: Policy vs. Politics
Despite agreement on the general idea, the path to enactment is complicated by two key issues:
- Structural Differences
The Senate’s bill is clean and simple: a stand-alone deduction for tips only. The House version bundles tax relief with immigration measures, energy policy, and spending cuts — increasing the odds of political impasse. - Budget Reconciliation Constraints
The House used the reconciliation process, which allows legislation to bypass the Senate filibuster. However, the Senate parliamentarian has stricter limits on what can be included. Provisions unrelated to taxes or spending could be stripped, triggering another round of negotiation.
This dynamic has turned a simple tax change into a legislative balancing act. As CNBC explains, both sides want to claim victory, but neither wants to concede the structure of the bill.
What Could Change — and What May Not Change
Even if a final version becomes law, it’s unlikely to remove all taxes on tips. Here’s what’s likely to stay in place:
- Payroll taxes (FICA, Medicare) will still apply to all wages, including tips.
- State income tax treatment will remain separate, unless states pass their own changes.
- Reporting compliance: both bills tie relief to properly documented tips, increasing the importance of accurate W-2 and payroll records.
As The New York Times notes, the Treasury Department would face significant rulemaking responsibilities, and businesses would need to update payroll systems to stay compliant.
Criticisms & Fiscal Concerns: Where the Opposition Focuses
While supporters highlight increased take-home pay for certain workers, analysts raise multiple objections:
- Revenue impact: The Tax Foundation estimates that an exemption could cost approximately $107 billion over ten years—before accounting for behavioral changes—and potentially up to $118 billion if structured as a permanent exclusion.
- Distributional equity: Research from Yale’s Budget Lab points out that about one-third of tipped workers already owe little or no federal income tax—indicating the bulk of benefits would flow to higher-earning individuals.
- Labor market distortions: Critics warn employers may shift compensation models—de-emphasizing base wages and encouraging tipping behaviors to exploit the tax code.
Furthermore, broader fiscal watchdogs, such as the Committee for a Responsible Federal Budget, have flagged concerns that the Senate version could add more than $100 billion to the national debt over a decade.
Where It Stands Now
- The Senate bill has passed unanimously.
- The House version has passed along party lines.
- No final law exists until reconciliation occurs — and that process is not guaranteed.
Political analysts suggest that August or September may be critical if either party wants to finalize the bill before fiscal deadlines or campaign season intensifies. For now, tips remain taxable as usual under federal law.
Concerned with Legislation? Contact Delia Law
This is not just a tax proposal — it’s a moving piece of a much larger fiscal and political strategy. Whether you’re managing multi-state payroll, reporting compensation structures, or reviewing year-end tax exposure, these developments could influence long-term planning and compliance policies.
Delia Law continues to monitor the legislative landscape as negotiations unfold. If and when final language is released, we’ll be prepared to help our clients interpret eligibility, navigate IRS documentation requirements, and integrate the changes into their broader tax strategy.
If you’re concerned about how new federal policies may affect your long-term tax planning, our team can help. We routinely assist clients with:
- IRS collections defense
- Tax audit representation
- Back tax resolution
- Unfiled tax returns
- Tax court representation
- IRS appeals
Contact Delia Law today to discuss how evolving federal tax policies may affect your current strategy—and how we can help you stay ahead.
