No Tax on Tips Act
The No Tax on Tips Act would create a new above-the-line deduction for “qualified tips,” allowing individual taxpayers to deduct cash tips they received and reported to their employer. The deduction would be capped at $25,000 per tax year and would apply to taxpayers regardless of whether they itemize deductions. The bill also directs the Treasury to publish a list of occupations that traditionally receive tips and excludes some high-earning employees from the deduction. In addition, the act would extend the employer Social Security tip credit to beauty-service establishments (e.g., barbering, hair care, nails, esthetics, body/spa treatments), with rules tied to minimum wage provisions and effective for tax years after 2024. The changes would affect withholding and would not require taxpayers to itemize to benefit, potentially lowering the after-tax cost of tipped income for many workers.
Key Points
- 1New deduction for qualified tips: There would be a deduction equal to the tips received and reported to the employer (on Form 6053a statements), capped at $25,000 per taxpayer per year.
- 2Occupations and eligibility: A Secretary-published list would identify occupations traditionally receiving tips as of 2023; only cash tips from those jobs would count. High-earning employees (as defined in the bill) would be excluded from the deduction.
- 3Non-itemizers enabled: The deduction would be available to taxpayers who do not itemize, added to the standard deduction framework and treated as a deduction under the tax code for nonItemizers.
- 4Itemized deduction rules adjusted: The deduction would not be treated as a miscellaneous itemized deduction and would not be limited by the overall itemized deduction cap, simplifying its treatment for itemizers as well.
- 5Withholding adjustments: The Treasury would modify withholding tables to reflect the deduction, aiming to align tax withholding with the new policy.
- 6Effective date: The changes would apply to tax years beginning after December 31, 2024.
- 7Extension of the tip credit to beauty services: The bill extends the employer Social Security tip credit to beauty-service businesses (barbering/hair care, nail care, esthetics, body/spa treatments), with rules aligned to minimum wage provisions (including special treatment for food/beverage establishments).
- 8Beauty service definition and scope: The bill defines “beauty service” to include barbering/hair care, nail care, esthetics, and body/spa treatments, expanding the sectors eligible for the tip credit.