On May 20, 2025, the Senate unanimously passed S.129, titled the "No Tax on Tips Act". This Act proposes amendments to the Internal Revenue Code of 1986 with the stated purpose of eliminating the application of the income tax on qualified tips through a deduction allowed to all individual taxpayers, and for other purposes. The bill also includes provisions related to the employer credit for a portion of social security taxes paid with respect to employee tips.

There are similar, but not identical, tip provisions in The One, Big, Beautiful Bill under consideration in the House of Representatives.

Below is a summary of the key provisions as described in the text of S.129:

Individual Deduction for Qualified Tips

The Act would amend the Internal Revenue Code of 1986 by adding a new section 224 to Part VII of Subchapter B of Chapter 1. This new section would allow a deduction for an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the employer pursuant to section 6053(a).

There is a maximum deduction allowed under this section, which shall not exceed $25,000 for any taxpayer for the taxable year.

The term "qualified tip" is defined for purposes of this section. Generally, it means any cash tip received by an individual in the course of such individual’s employment in an occupation which traditionally and customarily received tips on or before December 31, 2023, as provided by the Secretary of the Treasury. The Act mandates that the Secretary of the Treasury (or the Secretary’s delegate) shall publish a list of these traditionally tipping occupations no later than 90 days after the date of enactment.

Importantly, there is an exclusion for certain employees from the definition of a qualified tip. The term "qualified tip" shall not include any amount received by an individual if, for the preceding taxable year, that individual had compensation (within the meaning of section 414(q)(4)) from their employer in excess of the amount in effect under section 414(q)(1)(B)(i). This threshold, defined under IRC § 414(q)(1)(B)(i) and used for determining Highly Compensated Employee (HCE) status for non-5-percent owners, is $160,000 for the 2025 plan year (based on compensation earned in 2024).

The deduction for qualified tips would be treated favorably under the tax code. It would be allowed as a deduction for non-itemizers by being added to the list of deductions in section 63(b). For itemizers, the deduction would not be treated as a miscellaneous itemized deduction under section 67(b) and would not be taken into account under the overall limitation on itemized deductions under section 68(c).

The Act also requires the Secretary of the Treasury (or the Secretary’s delegate) to modify withholding tables and procedures prescribed under section 3402(a) to account for this new deduction.

Extension of Credit for Employer Social Security Taxes

Section 3 of the Act addresses the credit for employer social security taxes paid with respect to employee tips under IRC § 45B. It proposes to extend this credit to beauty service establishments.

The Act amends section 45B(b)(2) to state that the credit applies to tips received from customers or clients in connection with the providing, delivering, or serving of food or beverages (if customary) and the providing of beauty services to a customer or client if the tipping of employees providing such services is customary.

The term "beauty service" is defined to include:

Barbering and hair care.
Nail care.
Esthetics.
Body and spa treatments.

Regarding the calculation of the credit under section 45B(b)(1)(B), the Act amends the text concerning the minimum wage reference. It states that the minimum wage "as in effect on January 1, 2007" applies only in the case of food or beverage establishments.

Effective Date

Both the amendments made by Section 2 (relating to the individual deduction for qualified tips) and Section 3 (relating to the extension of the employer tip credit) would apply to taxable years beginning after December 31, 2024 should this bill become law.

Prepared with the assistance of NotebookLM.