No Tax on Tips ActThis bill establishes a new tax deduction of up to $25,000 for tips, subject to limitations. The bill also expands the business tax credit for the portion of payroll taxes an employer pays on certain tips to include payroll taxes paid on tips received in connection with certain beauty services.Under the bill, the new tax deduction for tips is limited to cash tips (1) received by an employee during the course of employment in an occupation that customarily receives tips, and (2) reported by the employee to the employer for purposes of withholding payroll taxes. (Under current law, an employee is required to report tips exceeding $20 per month to their employer.)Further, an employee with compensation exceeding a specified threshold ($160,000 in 2025 and adjusted annually for inflation) in the prior tax year may not claim the new tax deduction for tips.Finally, the bill expands the business tax credit for the portion of payroll taxes that an employer pays on certain tips to include payroll taxes paid on tips received in connection with barbering and hair care, nail care, esthetics, and body and spa treatments. (Under current law, an employer is allowed a business tax credit for the amount of payroll taxes paid on certain tips received by an employee in connection with providing, delivering, or serving food or beverages.)
The bill is significant as it alters the existing tax structure related to earnings from tips, potentially benefiting a vast number of employees in the service industry who rely on tips for a substantial portion of their income. By allowing a direct deduction for tips, the legislation encourages reporting of tips, fostering transparency and ultimately enhancing compliance with tax laws. It may lead to improved financial outcomes for individuals who may have avoided declaring or receiving their full earnings due to the tax implications associated with tip income.
House Bill 482, also known as the 'No Tax on Tips Act', seeks to amend the Internal Revenue Code of 1986 by eliminating the income tax on qualified tips. This legislation aims to provide a deduction for cash tips that employees receive while working in roles traditionally associated with tipping. The bill stipulates that taxpayers can deduct qualified tips received during the taxable year up to a maximum of $25,000, thus decreasing their taxable income and resulting tax burden. The definition of qualified tips would encompass cash tips in the service industry, including but not limited to restaurants and beauty services.
However, there are points of contention surrounding this bill. Critics argue that while the bill intends to lessen tax burdens on service workers, it may unfairly favor higher-income individuals who receive substantial tips, potentially replicating existing income inequalities. Additionally, there is a concern about how the implementation of this deduction will affect state and federal revenues, as the deduction may lead to a significant reduction in tax receipts from entities and individuals who will now declare less taxable income. These discussions suggest a need for ongoing evaluation of the bill's broader economic implications.