The Tipped Income Protection and Support Act (TIPS Act) would eliminate the current system that allows a separate, lower minimum wage for tipped employees and require tipped workers to be paid the standard federal minimum wage (the wage set in section 6(a)(1) of the Fair Labor Standards Act). Tips would be retained by employees, with allowed tip pooling among workers who regularly receive tips. The bill also adds a new tax deduction for cash tips (section 224 of the Internal Revenue Code) to help employees offset income tax liability on tips, subject to an adjusted gross income cap. The deduction is available to both itemizers and non-itemizers and is designed to be reflected in wage withholding. The act would take effect for tax years beginning after December 31, 2025 (i.e., generally starting in 2026).
Key Points
- 1Elimination of the tipped-employee minimum wage: Tipped workers must be paid the standard minimum wage, and all tips may be kept by the employee; tip pooling among tipped workers remains allowed.
- 2Strengthened penalties for tip misappropriation: Employers who unlawfully use or keep tips would be required to account for and compensate all such tips, with penalties adjusted accordingly.
- 3New cash-tip deduction (Section 224): Taxpayers may deduct the amount of qualified tips received and reported to the employer (via statements under 6053(a)) during the tax year.
- 4Qualified tips and eligibility: The deduction applies to tips from unrelated parties who do not have an ownership stake in the employer and are earned in occupations that traditionally receive tips (e.g., hospitality, cosmetology, food/beverage service, parking attendants, custodial service).
- 5Tax and withholding integration: The deduction is allowed for both itemizers and non-itemizers, is not treated as a miscellaneous itemized deduction subject to typical limits, and withholding tables would be adjusted to reflect the deduction. The deduction is effective for taxable years beginning after December 31, 2025.