U.S. Senate’s Unanimous Approval of No Tax on Tips Act Favors Small Group of Wage-Grade Workers

May 20, 2025

Overview

On May 20, 2025, the U.S. Senate unanimously passed the No Tax on Tips Act, a bipartisan bill exempting up to $25,000 in tips from federal income taxes for service workers earning less than $160,000 annually. Introduced by Senators Ted Cruz (R-TX) and Jacky Rosen (D-NV), the measure is consistent with a campaign promise by President Donald Trump to provide tax relief for tipped workers. The bill now awaits action in the House of Representatives and presidential approval to become law. While supporters view it as a lifeline for low- and middle-income workers, critics warn it may exacerbate the federal deficit and favor high-tip earners, raising questions about equitable and comprehensive tax reform.

Facts

The No Tax on Tips Act passed the Senate on May 20, 2025, with a 100-0 vote via unanimous consent, following a motion by Senator Jacky Rosen.
The bill allows a 100% tax deduction for up to $25,000 in cash and non-cash tips for workers in food, beverage, and beauty service industries, provided their income is below $160,000 (adjusted for inflation).
Employees must report tips exceeding $20 per month to employers for payroll tax withholding to qualify for the deduction.
The legislation amends the Internal Revenue Code to make the tip exemption permanent, unlike a House GOP proposal that expires after four years.
The House is considering a broader Republican-led tax package that includes a version of the no-tax-on-tips proposal, with a potential vote scheduled for May 21, 2025.
Historically, tips have been taxable income under federal law since the Internal Revenue Code of 1954, with the IRS requiring reporting since 1966.
The Act does not restrict states from taxing tips.
Under U.S. federal law, employees who earn at least $30 per month in tips may be paid a cash wage as low as $2.13 per hour—and if their total (wages + tips) does not reach the $7.25 federal minimum, the employer must make up the difference. As a result, gratuities can account for a median 58.5 percent of waitstaff’s earnings in the U.S.

Perspectives

Economic Policy Institute (EPI): The nonprofit think tank criticizes the bill, asserting it could discourage employers from raising wages and distracts from more effective policies like increasing the minimum wage or eliminating the subminimum wage for tipped workers.
House Speaker Mike Johnson (R-LA): Johnson supports including the no-tax-on-tips provision in the House’s broader tax package, aiming to align with Trump’s agenda, but faces resistance from Democrats opposing accompanying cuts to Medicaid and SNAP.
National Restaurant Association: The trade group endorses the bill, arguing it provides “meaningful tax relief” for restaurant workers, who often rely on tips as a primary income source, especially amid rising operational costs.
Urban–Brookings Tax Policy Center: Maintains that proposals to exempt tips from federal income (or payroll) taxes would primarily benefit a small subset of workers, risk encouraging employers to lower base wages, and could even reduce workers’ access to Social Security and other benefits. Not taxing tips does little to spur long-term skill development or career advancement. Instead, the Center recommends focusing on raising both tipped and standard minimum wages and expanding workforce-training incentives as more effective levers for career improvement.

Considerations

The bill’s projected $100B-$250B deficit impact over a decade could strain federal budgets, prompting scrutiny of offsetting revenue measures.
Permanent tip exemptions may shift tax burdens to non-tipped workers, raising equity concerns in tax policy design.
States with high service industry employment, like Nevada, may see short-term economic boosts from increased worker disposable income.
Long-term, the bill could incentivize employers to maintain low base wages, relying on tips to compensate workers.
The unanimous Senate vote reflects rare bipartisan consensus, potentially signaling broader support for targeted tax relief in future legislation.
House GOP efforts to bundle the measure with controversial budget cuts may delay or derail its passage, affecting its timeline.