Senate passes tax free tips bill to end federal taxes. Discover what this means for service workers and their take-home pay.
This bipartisan legislation is commendable. Rosen, a Democrat, stated on the Senate floor, “It has bipartisan support from both Democrats and Republicans; therefore, we should expedite its passage without any detrimental amendments.
“The bill was presented in the Senate in January 2025 by Senator Ted Cruz and a bipartisan coalition of co-sponsors, including Senators Jacky Rosen and Catherine Cortez Masto of Nevada.
Rosen’s request faced no opposition, leading to the bill’s passage, which now proceeds to the House. The bipartisan legislation will establish a tax deduction of up to $25,000 for cash tips reported to employers by employees for payroll tax withholding, with an income ceiling of $160,000 per annum for qualifying workers. The legislation mandates the US Department of Treasury to compile a list of occupations that typically receive tips within 90 days of the bill’s adoption.
The abolition of taxes on tips gained momentum during the 2024 presidential election, with Donald Trump advocating the proposal on the campaign trail in Nevada, followed by Kamala Harris’s endorsement of the concept. Economists and labour advocates have condemned the legislation, expressing fears that it will promote the proliferation of tipped employment, hinder wage increases, and impact merely a small fraction of approximately 5% of low-wage workers who receive tips.
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Brookings Institute study indicates that 37% of tipped workers currently pay no federal income tax due to their minimal earnings, and abolishing sub-minimum wages for these workers would have a greater effect. Lena Simet, a senior researcher at Human Rights Watch, stated to the Guardian in August 2024 that the absence of earnings floors, including a minimum wage floor and calls for an increase, renders workers susceptible to exploitation and inequality in the labour market, which is detrimental to the economy as a whole.
“This does not imply that workers are prohibited from receiving tips.” It signifies that a gratuity is added to a pay baseline that ensures a minimum compensation.
In 2023, around 4 million U.S. workers were employed in tipped occupations, constituting 2.5% of total employment, according per estimates by The Budget Lab at Yale University.“This represents a highly specific segment of the workforce,” stated Alex Muresianu, senior policy analyst at the Tax Foundation. Tipped professions encompass those in the hospitality sector, such as restaurants and hotels, in addition to courier services like taxis, rideshares, and food delivery services, he stated.
Furthermore, a substantial proportion of tipped workers are employed part-time, and they would not experience considerable advantages from a tip exemption, he stated. Numerous workers currently do not remit federal income tax due to their wages being below the standard deduction threshold.
“It offers no incremental advantage for the lowest income tipped workers,” stated Muresianu. “It would significantly benefit moderate to middle-income workers.” In the 2024 presidential campaign, both Trump and Vice President Kamala Harris advocated for the elimination of taxes on tips during their engagements in Nevada.
The legislation proposed by the House Ways and Means Committee last week also included a provision exempting tips from taxation. If implemented, employees may deduct all “qualified tips” from 2025 to 2028. Tips must be documented to be eligible for the deduction. Nonetheless, this may still alter before to the comprehensive House floor vote.
“Regardless of whether it is enacted independently or as a component of a larger legislative package, the elimination of taxes on tips will ultimately be codified into law, providing genuine relief to diligent Americans,” stated Senator Ted Cruz, R-Texas, from the Senate floor on Tuesday.
Cruz presented the bipartisan legislation in January alongside Senators Jacky Rosen and Catherine Cortez Masto of Nevada.
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