Sponsors (9)
The bill increases take-home pay for many tipped workers and lowers payroll-tax costs for some small employers by clarifying and expanding tip-related tax benefits, at the cost of reduced federal/payroll revenues, added compliance burdens, and risks of limited wage growth or misuse by employers.
Tipped workers (servers, bartenders, beauty/service staff) keep more pay because reported cash tips can be deducted above the line and employers are more likely to credit tips toward Social Security, increasing take-home/net pay and reducing withholding for many low-income workers.
Small businesses in beauty and personal-care (salons, barbershops, spas) get lower payroll tax liabilities via the Social Security tip credit, improving cash flow and reducing employer tax costs.
Employers, workers, and the IRS get clearer, modernized rules (Treasury guidance on qualifying occupations and removal of an outdated minimum-wage reference), reducing administrative ambiguity and making it easier to apply the law consistently.
Taxpayers and program beneficiaries face reduced federal and payroll-tax revenues because the new deduction and expanded Social Security tip credit lower government receipts, which could increase deficits or pressure other taxes/spending (including Social Security funding) if not offset.
Employers (especially small businesses) and the IRS will incur compliance and implementation costs—updating payroll systems, withholding tables, reporting processes, and handling disputes—which raises administrative burdens and short-term costs.
Tipped workers may not see higher base wages if employers rely on the tax/credit incentives instead of raising pay, limiting long-term wage growth despite immediate tax benefits.
Based on analysis of 3 sections of legislative text.
Creates an above-the-line deduction for reported cash tips (up to $25,000) and expands the employer Social Security tip credit to include specified beauty services.
Creates an above-the-line federal income tax deduction for qualified cash tips reported to an employer, up to $25,000 per taxpayer per year, and expands an existing employer payroll (Social Security) tip credit to cover specified beauty services. It requires Treasury to publish a list of occupations that traditionally receive tips and directs withholding rules to be updated so the deduction is reflected in payroll withholding. The new deduction and the expanded employer credit both apply to tax years beginning after December 31, 2024. The deduction is available to non-itemizers, excluded from the miscellaneous itemized deduction floor and other itemized deduction limits, and excludes employees who last year earned above certain compensation thresholds from the same employer for eligibility purposes.
Official title: Amend the Internal Revenue Code of 1986 to eliminate the application of the income tax on qualified tips through a deduction allowed to all individual taxpayers, and for other purposes.
Introduced January 16, 2025 by Rafael Edward Cruz · Last progress May 26, 2025