Big Tax Relief Ahead: What the “No Tax on Tips Act” Means for Service Workers

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  2. Big Tax Relief Ahead: What the “No Tax on Tips Act” Means for Service Workers
no tax on tips act

The No Tax on Tips Act is officially in place. What does that mean for people that work in the service industry and other employees that rely heavily on tips? We answer those questions and more below. You can also visit out blog for more legal details.

What the Bill Proposes

At the heart of the bill is a straightforward and worker-friendly provision: an income tax deduction for up to $25,000 in qualified tips received per year. This would apply to tips that:

– Are cash tips received during the course of employment, and
– Are reported to the employer as required by existing IRS rules under section 6053(a) of the Internal Revenue Code.

This change allows workers to deduct tip income directly from their gross income, meaning they wouldn’t have to pay income tax on those amounts.

Note on Terminology: Although the bill refers to the $25,000 benefit as a “deduction,” it functions more like an exclusion. The deduction applies above the line, reducing gross income directly. That means even taxpayers who take the standard deduction will still receive the full benefit, making it more broadly accessible.

Who’s Eligible for the No Tax on Tips Act?

The bill includes several safeguards to ensure the deduction is targeted and fair:

– Occupational Limitations: Only workers in jobs that “traditionally and customarily received tips on or before December 31, 2023” will qualify. The U.S. Treasury Department will publish a definitive list of these occupations within 90 days of the bill’s enactment.

– Income Cap: The deduction is not available to employees who earned more than the highly compensated employee threshold (under IRC §414(q)) from the same employer in the previous tax year. This ensures that the benefit goes to lower- and middle-income earners.

– Deduction Limits: The deduction is capped at $25,000 per year, regardless of total tips earned.

Expanded Credit for Beauty Industry Employers

The Act also amends Section 45B of the Internal Revenue Code to extend the employer tax credit on tips beyond food and beverage establishments. Now, businesses offering “beauty services” are also covered, including:

– Barbering and Hair Care
– Nail Care
– Esthetics
– Body and Spa Treatments

This allows beauty service establishments to claim a credit against their Social Security tax liability for tipped wages, which is an incentive already available to restaurant owners. The change ensures tax parity across multiple tipped service industries.

Real-World Scenario

Take Kim, a licensed esthetician in Memphis. She earns about $18,000 a year in cash tips, which she reports to her employer. Under the new bill, Kim could deduct that entire amount from her taxable income. This can potentially save her over $2,000 in federal income taxes, depending on her tax bracket. This could go a long way toward covering living expenses, student loans, or starting a retirement fund.

A Step Toward Economic Equity

This legislation signals a broader recognition of how tip-reliant workers are often underserved by the tax code. Unlike salaried professionals, tipped workers frequently:

– Face variable and unpredictable income
– Rely heavily on customer generosity
– Work in industries disproportionately staffed by women and minorities

By aligning tax policy with the lived reality of service professionals, the No Tax on Tips Act affirms their value and helps address long-standing inequities.

Final Thoughts from Our Firm

The Crone Law Firm, PLC supports legislation that promotes dignity, equity, and fairness in the workplace. If passed, the No Tax on Tips Act would offer tangible relief to hardworking individuals whose labor is too often overlooked.

We urge service workers and business owners alike to stay informed as this bill progresses. If you have questions about how this could impact your tax obligations, or your business’s payroll and reporting practices, don’t hesitate to contact our legal team. Contact us now to learn more about your benefits.

*The contents of this blog post are for informational purposes only and do not constitute legal or tax advice. For personalized guidance, please consult a licensed attorney or tax professional.*

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