Sponsors
The bill raises take-home pay and improves cash flow for tipped, low-income workers by excluding up to $20,000 in tips and simplifying withholding, but it reduces federal revenue and creates added administrative complexity and potential fairness issues for taxpayers and employers.
Low-income and tipped workers can exclude up to $20,000 in tips from taxable income each year, increasing their take-home pay and potentially boosting eligibility or benefit amounts for refundable credits such as the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC).
Tip-earning employees and employers will benefit from simplified withholding rules (after Treasury guidance), which should reduce overwithholding and improve workers' cash flow during the year.
All taxpayers may face higher federal deficits or eventual offsetting tax increases or spending cuts because excluding tips from taxable income reduces federal revenue.
Taxpayers and employers—particularly small businesses—will incur added tax-code complexity and administrative burdens to implement the new exclusion and updated withholding rules.
Tipped workers and employers could face uneven or more complex tax outcomes because the bill excludes tips from income while disallowing related deductions or credits (other than CTC and EITC), creating fairness and tax-planning issues.
Based on analysis of 2 sections of legislative text.
Excludes up to $20,000 per year of eligible tips from federal gross income for tip-reliant workers through 2029, with withholding changes and limited interaction with other credits.
Introduced January 20, 2025 by Donald J. Bacon · Last progress January 20, 2025
Excludes up to $20,000 per year of qualifying tips from a worker’s federal gross income for tip-reliant jobs (examples: food service, hospitality, cosmetology), effective for tips received after December 31, 2024 and ending after December 31, 2029. The exclusion cannot be used to claim additional deductions or credits based on the excluded amount, but the excluded tips still count when calculating the Child Tax Credit and Earned Income Tax Credit. Treasury must adjust withholding tables and procedures to reflect the change.