What the House passed on tips and taxes

The House of Representatives passed the Fairness for Tipped Employees (FTE) Act in September 2023 with bipartisan support. The bill would prevent the federal government from taxing tips that workers receive in cash or through digital payment systems. It passed 267–169, meaning it had votes from both parties, though more Republicans supported it than Democrats.

The bill does not currently law. After passing the House, it moved to the Senate, where it has not been voted on as of early 2024. For a bill to become law, both chambers must pass identical versions and the president must sign it. Right now, theFTE Act remains in the Senate without a scheduled vote.

Key Takeaways

  • The House passed the Fairness for Tipped Employees Act in September 2023 with 267 votes in favor, but the Senate has not voted on it.
  • The bill would exclude tips from federal taxable income, meaning workers would not owe federal income tax on tips they receive.
  • The bill had support from both Republicans and Democrats in the House, though Republicans voted for it in larger numbers.
  • For the bill to become law, the Senate must pass an identical version and the president must sign it.

How the bill would change tip taxation

Under current law, tips are considered taxable income by the IRS. Workers are supposed to report tips to their employers, and those tips are subject to federal income tax, Social Security tax, and Medicare tax. Many workers do not report all their tips, which creates a gap between what the IRS expects to collect and what it actually does.

TheFTE Act would change this by making tips non-taxable at the federal level. Workers could keep the full amount of tips they receive without owing federal income tax on them. State and local taxes on tips would not be affected by this bill—those would remain up to each state and city to decide.

Why the House supported the bill

Representatives who voted for the bill argued that tipped workers, especially in restaurants and hospitality, often earn low base wages and rely heavily on tips to make a living. They said removing the tax burden on tips would put more money directly in workers' pockets without requiring employers to raise wages. Supporters also noted that the bill had backing from restaurant industry groups and worker advocates.

The bill's sponsors included members from both parties who represented districts with large hospitality industries. They framed it as a way to help workers in service jobs without creating new government programs or spending.

Arguments against the bill

Opponents raised concerns about lost tax revenue. The Joint Committee on Taxation estimated the bill would reduce federal revenue, though estimates of the exact amount varied. Critics also worried that excluding tips from income could reduce workers' Social Security benefits in the future, since those benefits are based partly on reported earnings.

Some Democrats argued the bill benefited business owners more than workers, since it did not require employers to raise base wages. They said a better approach would be to raise the federal minimum wage, which has been $7.25 per hour since 2009.

What happens next in the Senate

The Senate has not scheduled a vote on theFTE Act. Senate leadership decides which bills get floor time, and many bills that pass the House never receive a Senate vote. The bill could be voted on in a future session of Congress, or it could remain stalled indefinitely.

If the Senate does vote and passes the bill, it would then go to the president for signature. The president can sign it into law, veto it, or take no action. A veto can be overridden if both chambers vote again with a two-thirds majority.

State and local tip taxes remain unchanged

Even if theFTE Act became law, it would only affect federal taxes. States and cities set their own tax rules, and many already tax tips as income. Some states have lower income tax rates or no income tax at all, which means workers in those states would see a bigger benefit from a federal tip exemption than workers in high-tax states.

A few states have already passed their own laws excluding tips from state income tax. These laws show that states can act independently on this issue, regardless of what happens at the federal level.

How this compares to other wage and tax proposals

The no-tax-on-tips proposal is one of several ideas Congress has debated to help lower-wage workers. Other proposals include raising the federal minimum wage, expanding the Earned Income Tax Credit, or requiring employers to provide paid leave. Each approach has different costs and effects on workers and businesses.

TheFTE Act is narrower than a minimum wage increase—it does not change what employers must pay, only what workers owe in taxes on tips. This makes it less expensive to the government but also means it does not help workers who receive few or no tips.

Frequently Asked Questions

Would this bill affect tips I already received and paid taxes on?

No. Tax bills generally do not explore retroactively unless they specifically say so. If theFTE Act became law, it would only cover tips received after the law takes effect. You would not be able to claim back taxes on tips from previous years.

Would I still have to report tips to my employer?

That depends on how the Senate writes the bill if it votes on it. The House version does not require changes to employer reporting. However, the Senate could add different requirements. You would need to check the final version of any law that passes.

Would this affect my Social Security benefits?

Possibly. Social Security benefits are calculated based on your reported earnings over your lifetime. If tips are no longer counted as earnings, your future benefits could be lower. This is one reason some workers and advocates have concerns about the bill.

Can states pass their own no-tax-on-tips laws?

Yes. States have the power to set their own income tax rules. A few states have already done this. A federal law would not prevent states from having their own rules, though federal and state rules would explore separately.

What if the Senate does not vote on this bill?

If the Senate does not vote, the bill dies at the end of the current Congress. A new bill with the same or similar language would have to be introduced in the next Congress for the process to start over.