No Tax on Tips: What the Proposal Means for Workers

The phrase “no tax on tips” has gained attention in recent political and economic discussions. The idea generally refers to a proposal to eliminate or reduce federal taxes on tip income, which could allow workers in tipped professions to keep more of their earnings.

Currently, however, tips are considered taxable income under federal law. Unless laws change, workers who receive tips are generally required to report them and pay taxes on them.

Understanding how tip income is taxed today -- and what a “no tax on tips” policy could mean -- can help service workers better plan their finances.

In the meantime, learn how you can become eligible to file your taxes in the MoneyLion app.

Are Tips Currently Taxed?

Yes. Under current U.S. tax law, tips are taxable income. Employees who receive tips must report them to their employer if they earn $20 or more in tips during a month.

Reported tips are subject to:

• Federal income tax

• Social Security tax

• Medicare tax

According to the Internal Revenue Service (IRS), tip income is treated the same as wages for tax purposes.

How Tip Income Is Reported

Workers who receive tips must typically track and report them. Employers use this information to calculate payroll taxes.

The process generally works like this:

1. Employees record tips received each day

2. Monthly tip totals are reported to the employer

3. Employers include tip income on Form W-2

Employees then include those earnings when filing their tax returns.

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Trump’s call for tax-free tips policy

President Donald Trump has repeatedly promised to eliminate federal taxes on tips. In January 2025, he reiterated this stance in Nevada, stating:

“For any worker who relies on tipped income, your tips will be 100% yours.”

Trump’s proposal aligns with the Republican platform for 2024, which includes no taxes on tips for restaurant and hospitality workers. However, some lawmakers worry that a broad exemption could be abused, leading to wealthy professionals reclassifying income as “tips” to avoid taxes.

Why the “No Tax on Tips” Idea Is Being Discussed

The “no tax on tips” concept has been proposed as a way to increase take-home pay for workers in service industries.

Jobs that commonly rely on tips include:

• Restaurant servers

• Bartenders

• Delivery drivers

• Hotel staff

• Hair stylists

Supporters of the proposal argue that eliminating taxes on tips could help workers in lower-wage industries keep more of their income.

How Much Tip Income Workers Earn

Tip income can represent a significant portion of wages for service workers. According to the Bureau of Labor Statistics, more than 2 million Americans work as waiters and waitresses, many of whom rely heavily on tips for income.

In some hospitality jobs, tips can account for a large percentage of total earnings.

Legislation in progress

Several bills have been introduced in Congress, including:

• The No Tax on Tips Act. Allows up to $25,000 of tipped income to be tax-free.

• The Tip Tax Termination Act. Provides a $20,000 exemption for tipped workers over a five-year period.

• The Tax Free Tips Act. Completely removes tips from taxable income.

The key debate? Guardrails to prevent high earners from exploiting the system. While some Republicans push for a full exemption, others favor capping tax-free tips at a reasonable amount.

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What Would “No Tax on Tips” Change?

If a “no tax on tips” policy were implemented, it could potentially remove or reduce certain taxes on tip income. Possible changes might include:

• Eliminating federal income tax on tips

• Removing payroll taxes on tips

• Increasing reporting thresholds

However, the details would depend on how any legislation is written. At the moment, no federal law has eliminated taxes on tips.

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Arguments Against Eliminating Tip Taxes

Critics say eliminating taxes on tips could create challenges for the tax system.

Common concerns include:

• Reduced federal tax revenue

• Potential tax avoidance through tip reclassification

• Unequal treatment between tipped workers and other employees

Because of these concerns, some policymakers suggest alternative solutions, such as raising minimum wages instead.

How Tips Are Taxed Today

Under current rules, tips are taxed just like regular wages. Tip income is generally subject to:

Employers must also pay their share of payroll taxes on reported tips.

Tax Credits That May Help Tipped Workers

Although tips are taxable, some workers may qualify for tax credits that reduce their tax bill.

Examples include:

• Earned Income Tax Credit (EITC)

• Child Tax Credit

• Child and Dependent Care Credit

The IRS reports that the Earned Income Tax Credit provides billions of dollars in tax relief to eligible workers each year.

Final Takeaway

The idea of “no tax on tips” has attracted attention as a potential way to increase earnings for workers in the service industry. However, under current U.S. tax law, tips are still considered taxable income.

Employees who receive tips are generally required to report them and pay federal income and payroll taxes on that income. While policy discussions about changing tip taxation continue, workers should still follow existing IRS reporting rules when filing their taxes.

Frequently Asked Questions

Are tips currently taxed in the United States?

Yes. Tips are considered taxable income by the IRS and are generally subject to federal income tax, Social Security tax and Medicare tax.

What does “no tax on tips” mean?

“No tax on tips” refers to proposals that would eliminate or reduce federal taxes on tip income so workers could keep more of their earnings.

Do employees have to report tips to their employer?

Yes. Employees must report tips to their employer if they receive $20 or more in tips during a month.

Would eliminating tip taxes increase worker income?

If implemented, removing taxes on tips could increase take-home pay for workers in service industries. However, no federal law has made this change yet.

Do tipped workers qualify for tax credits?

Yes. Many tipped workers may qualify for tax credits such as the Earned Income Tax Credit, which can reduce their total tax bill.

Sources

Internal Revenue Service (IRS). Topic No. 761 — Tips: Withholding and Reporting. https://www.irs.gov/taxtopics/tc761

Internal Revenue Service (IRS). Tip Recordkeeping and Reporting Requirements. https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting

Internal Revenue Service (IRS). Earned Income Tax Credit Information. https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit

U.S. Bureau of Labor Statistics (BLS). Occupational Employment Statistics for Food Service Workers. https://www.bls.gov/oes/

U.S. Department of the Treasury. Overview of Federal Payroll Taxes. https://home.treasury.gov/services/taxes