No Tax on Tips Act: What is it? How will it benefit tipped workers? How will it affect me? What can I do to manage unintended consequences?

What is the No Tax on Tips Act?

On Tuesday, May 20, 2025, the U.S. Senate unanimously passed the No Tax on Tips Act, a bill now header for a Senate floor vote, and then to President Donald Trump’s desk, for signature into law.

The No Tax on Tips Act is a bill unanimously passed by the Senate, which seeks exempting up to $25,000 in annual cash tips from federal income tax. This bill holds the promise of helping service-industry workers in the United States, including those in Delaware County, Pennsylvania. If its unanimous Senate vote is a promise for Congress acting on some Main Street priorities, the No Tax on Tips Act’s next vote, in the U.S. House of Representatives will be a tentative step towards tackling a unifying issue. President Donald Trump’s signature of this bill into law will represent a most significant step in the direction of fulfilling a presidential campaign promise.

What immediate benefits does the No Tax on Tips Act give me as a tipped worker?

With 10% to 15% of U.S. employees considered tipped employees, even a fractional representation of Delaware County residents in service-sector jobs would translate into enormous gains. Even a 5% to 10% representation in tipped service-sector jobs would mean between 15,622 and 31,245 of Delaware County’s over 312,000-person workforce seeing a relatively significant increase in their net (take-home) pay.

The No Tax on Tips Act is meant to provide relief for service industry works whose gross pay includes tips. Before implementation of the No Tax on Tips Act, a service-sector worker whose paycheck comprises tips would, all else being equal, report his/her tips to the Internal Revenue Service when the tipped worker prepares and files his/her taxes. In reconciling the employee’s tax return with the employer-filed information return, the I.R.S. would assess a tax on the employee’s taxable income, with such amount including tips. In this instance, an employee whose taxable income falls in the 10% tax bracket would then pay a 10% tax on his/her taxable income. An individual with $21,6177.56 in taxable 2024 earnings would, based on the IRS 2014 tax brackets, pay $2,161.78 in federal taxes. This would be the case irrespective of the breakdown between wages and tips, as all income is considered taxable income.

How will the No Tax on Tips Act affect me?

With passage of the No Tax on Tips Act in both chambers of Congress and presidential signature of this Act into Law, workers whose earnings comprise tips stand to benefit. The degree of benefit from this law will vary among workers, with a given employee’s monetary gain from this law resting on many factors, including the following:

· The percentage of earnings derived from tips,

· The state in which you live,

· The state where you work (if you work in a state different from the one in which you live),

· Whether a reciprocal agreement on taxes exists between your home state and the state in which you work, if these two states are different), and

· The amount your earnings spill into a higher tax bracket

A taxpayer in the above exemplar scenario who derives 50% of her earnings from tips would see a halving of her taxes, bringing her federal tax burden to $1,080.89. The higher the percentage of your earnings derived from tips, the greater the savings, as an ever-higher percentage of your earnings is deducted from your taxable income. Deriving a lower percentage of your earnings from tips, conversely, promises lower savings for you.

A reciprocal tax agreement allowing you to pay taxes to the state with lower taxes would allow you to save more on your tips which will, otherwise, remain taxable to a state that collect state income tax.

An individual would enjoy additional tax savings in the following instance: If your Adjusted Gross Income (AGI) bumps you into a higher tax bracket by a relatively small amount, exempting your tips to derive your taxable income could bump you back into a lower tax bracket, thereby saving you a relatively lager portion of money you would have otherwise had to pay in a higher tax bracket.

The average service sector worker in Delaware County, Pennsylvania, whose total earnings comprise tips will derive some financial benefit from the No Tax on Tips Act. Workers should remain vigilant about how implementation of this law would affect them individually. This is because this law could engender complacence which, in turn, triggers unintended consequences that could leave tipped service sector workers worse-off.

What can I do to manage unintended consequences?

Managing the challenge of understanding how the No Tax on Tips Law affects workers could include an individual speaking with a financial adviser to craft, implement and monitor a financial plan any negative offset to a worker’s earnings, which may result from unintended consequences from either the way in which this law is implemented, or from customer, business and/or industry reaction to the rollout of this law.

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Benjamin Conteh, Bargeld Financial

May 20, 2025 at 12:04 PM