The No Tax on Tips bill did not pass Congress

The No Tax on Tips Act was introduced in Congress but never became law. The bill would have made tips exempt from federal income tax, meaning workers would not owe income tax on money customers gave them. It did not advance far enough through the legislative process to reach a vote in both chambers, so it remains a proposal rather than a law you can use.

Different versions of the bill were introduced in different years, most notably in 2021 and 2023. None of them moved past the committee stage or gained enough support to pass. This means the current tax rules for tips remain unchanged: tips are still counted as taxable income on your federal tax return.

Key Takeaways

  • The No Tax on Tips Act was proposed but did not pass Congress, so tips remain taxable income under current federal law.
  • Tips must be reported to your employer and included on your W-2 form, and you owe federal income tax on the full amount.
  • Some states have their own rules about tip taxation that differ from federal law, so your state tax bill may vary.
  • If you work in a tipped industry, you should report all tips to your employer and set aside money for taxes owed on that income.

How tips are taxed under current law

Under federal tax law, tips are treated as wages. Your employer is required to report tips you receive to the IRS on your W-2 form at the end of the year. You then owe federal income tax on those tips just as you do on your regular hourly pay or salary.

If you receive tips in cash, you are still required to report them to your employer. Many workers do not report all cash tips, but the IRS expects you to claim them. If you are audited and the IRS finds unreported tip income, you will owe back taxes plus penalties and interest.

Your employer may also withhold Social Security and Medicare taxes (FICA taxes) from your tips. This means the money comes out of your paycheck automatically, similar to how income tax withholding works.

Why the bill was proposed

Supporters of the No Tax on Tips Act argued that tips are gifts from customers, not income earned by the business, and should not be taxed. They pointed out that tipped workers often earn low base wages and rely heavily on customer generosity to make a living.

The bill gained attention during periods when inflation was high and workers were struggling with cost of living. Advocates said removing the tax burden on tips would help service industry workers keep more of what customers gave them.

However, the bill faced opposition from those who argued that tips are income and should be taxed like any other earnings. Critics also noted that removing the tax would reduce federal revenue and shift the tax burden to other workers.

What happened in Congress

The most recent version of the No Tax on Tips Act was introduced in 2023 but did not move forward. It was referred to the House Ways and Means Committee, which handles tax legislation, but no vote was scheduled.

Earlier versions in 2021 and 2022 also stalled in committee. Without committee approval and a floor vote, a bill cannot become law. The lack of movement suggests the bill did not have enough support among lawmakers to advance.

Tax legislation is difficult to pass because it affects federal revenue and has broad implications for the tax system. A bill that removes tax on one type of income must either raise taxes elsewhere or reduce government spending, which makes it controversial.

State-level tip tax rules

While the federal bill did not pass, a few states have their own rules about tip taxation. Some states do not tax tips at all, while others tax them the same way the federal government does.

If you live in a state with no state income tax — such as Texas, Florida, or Nevada — you do not owe state tax on tips, even though you still owe federal tax. If you live in a state with income tax, you typically owe state tax on tips as well as federal tax.

A small number of states have explored tip-related tax breaks, but these are rare and usually limited. Check your state's tax agency website or speak with a tax professional if you want to know your state's specific rules.

What you should do about tips and taxes

If you receive tips as part of your job, report all of them to your employer. Your employer needs the information to fill out your W-2 correctly. At tax time, the tips will appear on your W-2 and you will owe federal income tax on them.

If you receive cash tips, keep a record of what you receive each day. Many workers use a straightforward notebook or a phone app to track tips. This record helps you report the correct amount to your employer and protects you if the IRS questions your return.

When you file your tax return, make sure all tips reported on your W-2 are included in your taxable income. If you received tips that were not reported to your employer, you may still need to report them on your return, though this is less common.

Frequently Asked Questions

Do I have to report cash tips to my employer?

Yes. Federal law requires you to report all tips to your employer, including cash tips. Your employer needs this information to report your income correctly to the IRS on your W-2. Failing to report tips can result in penalties if you are audited.

Can I deduct tips I give to other workers?

No. Tips you give to coworkers or other workers are not tax deductible. You owe income tax on all tips you receive, and you cannot reduce that by claiming tips you gave away.

What if my employer does not report my tips on my W-2?

Contact your employer and ask them to issue a corrected W-2. If they refuse, you can file a complaint with the IRS or your state labor department. You may still owe tax on the tips even if your employer fails to report them.

Are tips taxed differently if I am self-employed?

If you are self-employed and receive tips, they are part of your business income and subject to both income tax and self-employment tax. Self-employment tax covers Social Security and Medicare and is typically higher than the FICA taxes withheld from an employee's paycheck.

Will the No Tax on Tips bill ever pass?

It is possible but not certain. The bill would need to be reintroduced and gain support in Congress. Tax bills are difficult to pass, and this one has not moved forward in recent years, so there is no clear timeline for whether it will become law.