There might be good news ahead for restaurant servers. The U.S. House of Representatives passed the “One Big Beautiful Bill Act,” allowing tax breaks on overtime pay and tipped earnings as part of the reconciliation bill. In a similar vein, the Senate passed its own bill, the “No Tax on Tips Act,” which would provide a permanent tax deduction on tipped earnings.
Tips make up 23% of restaurant workers’ total income. The Internal Revenue Service (IRS) currently requires that tips over $20 be reported. Under both of the proposed legislative bills, many employees in the restaurant and hospitality industry who receive cash tips and report tips to employers for payroll tax withholding will be eligible for the tax deduction if they make less than $160,000 per year.
One Big Beautiful Bill Act
Congress’s One Big Beautiful Bill Act creates a temporary tax deduction until 2028 from gross income for tips and for overtime hours worked.
Under this legislation, employees in “traditionally and customarily tipped industries” would be exempt from paying taxes on tips. The most common industry is the hospitality and restaurant industry, but the bill is expansive and covers businesses that provide beauty services, such as barber shops and hair salons. Examples of tip-earning employees include waiters, bartenders, delivery drivers, and beauty service employees, such as barbers, estheticians, and nail technicians.
No Tax on Tips Act
The Senate’s No Tax on Tips Act would allow a permanent tax deduction of $ 25,000 per year for qualified tips of tipped employees. Qualified tips are tips paid in cash, credit, or debit card, in traditionally and customarily tipped industries. In comparison, the One Big Beautiful Bill Act creates a temporary deduction and does not cap the amount of tipped income that workers can deduct. The Senate bill provides a tax deduction for tipped employees, while the congressional bill includes a tax deduction for tipped employees and independent contractors.
What Are Experts Saying?
Some policy experts believe that the tax breaks may harm workers more than help them, and higher-paid tipped workers will likely benefit more than low-income workers. According to the Brookings Institution, almost 4 in 10 tipped workers do not earn enough to pay federal income tax.
In addition, there is growing concern that employers may reclassify their workers as tipped workers because the new bills will allow them to receive a tax break. According to the FLSA, the minimum wage for tipped workers is $2.13 per hour, compared to $7.25 an hour for non-tipped workers. Note that many states have a higher tipped minimum wage for servers (including New York City, which is $11.00 per hour).
The White House’s Council of Economic Advisers issued a report stating that"the tip exemption will significantly increase take-home pay for most tipped workers, many of whom are low—to middle-income taxpayers." The report estimates that the average take-home pay for tipped workers would increase by $1,675 per year.
Leaders within the hospitality and restaurant industry, such as Rosanna Maietta, President and CEO of the American Hotel & Lodging Association, stated, “AHLA applauds the U.S. Senate for unanimously passing the 'No Tax on Tips Act.” This bipartisan legislation will put more money in the pockets of the hundreds of thousands of hotel workers who receive tips, ranging from housekeepers and valets to food service professionals and bellhops.” In addition, the National Restaurant Association issued a statement describing the No Tax on Tips legislation as a “major victory for restaurant owners, employees, and the communities they serve.”
If you have questions about a tip credit issue, call the attorneys at Pechman Law Group at 212-583-9500.
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