Tips Could Soon Be Tax-Free Thanks to New Senate Bill

In a rare show of unity, the U.S. Senate unanimously approved the No Tax on Tips Act, a measure that would make tips exempt from federal taxes. The bill is designed to ease financial pressure on millions of service workers across the country.

Tipped employees in industries such as restaurants, hospitality, and delivery often rely on gratuities as a primary source of income. By removing federal taxes on tips, lawmakers aim to boost take-home pay for those living paycheck to paycheck.

The legislation was introduced by Senator Ted Cruz of Texas and co-sponsored by Senator Jacky Rosen of Nevada. Cruz emphasized that workers “deserve to keep more of what they earn,” while Rosen noted its importance for states with strong tourism economies.

Currently, all tips must be reported as taxable income, and employers are required to withhold federal taxes. This system has long been criticized for complicating reporting and straining both employees and businesses.

Under the new plan, workers would still record tips for documentation, but the money would not count toward federal income taxes. Wages, salaries, and bonuses from employers, however, would remain taxable.

Advocates argue the bill reduces administrative burdens while providing meaningful savings for service workers. Critics, including some tax specialists, have raised concerns over enforcement and the impact on Social Security contributions.

Having cleared the Senate, the proposal now heads to the House of Representatives. Supporters believe it has strong momentum and could represent a landmark victory for workers whose livelihoods rely on tipping.