Sponsors (28)
The bill provides meaningful tax relief and clearer rules for tipped workers and beauty-service employers, but it reduces federal revenue and creates administrative and compliance burdens with a risk that employers shift pay toward tips, increasing income volatility for workers.
Tip-earning workers (including many low-income workers who take the standard deduction) can deduct up to $25,000 of reported cash tips from federal gross income, lowering their federal tax liability.
Making the deduction available to non-itemizers means workers who use the standard deduction — not just those who itemize — will benefit.
Once Treasury updates withholding tables, payroll withholding will be simpler for tipped workers, reducing withholding complexity for employees and small employers.
Allowing the deduction and expanding the payroll tax credit reduces federal tax and payroll tax revenue, which could increase the federal deficit or require cuts to other programs absent offsets.
Employers might shift more compensation toward tips to qualify for the credit, increasing workers' reliance on unpredictable tip income and reducing wage transparency.
Businesses and payroll providers must update withholding, payroll systems, and recordkeeping to implement the deduction and the credit, imposing compliance and administrative costs on employers (especially small businesses).
Based on analysis of 3 sections of legislative text.
Creates an above-the-line deduction (up to $25,000) for reported cash tips, expands the employer Social Security tip credit to certain beauty services, and requires withholding updates.
Creates a new above-the-line deduction for cash tips reported to an employer, capped at $25,000 per taxpayer per year, and expands the employer social security tax credit for tips to cover specified beauty services. The deduction is available to taxpayers who do not itemize and requires Treasury to publish a list of occupations that qualify; it takes effect for tax years beginning after December 31, 2024. Also requires Treasury to update withholding tables and payroll procedures to account for the new deduction and adjusts the rules determining the employer tip credit (including adding a statutory definition of covered beauty services such as barbering, hair care, nail care, esthetics, and body/spa treatments).
Introduced January 16, 2025 by Vernon G. Buchanan · Last progress January 16, 2025