In an increasingly divided political climate, the U.S. Senate has achieved a rare and significant bipartisan victory with the unanimous passage of the “No Tax on Tips Act,” a landmark piece of legislation aimed at exempting tip income from federal income taxation. The bill, co-sponsored by Senator Ted Cruz (R-TX) and Senator Jacky Rosen (D-NV), represents a powerful consensus across party lines in support of the millions of American workers who rely heavily on gratuities to make ends meet.
If enacted into law, the bill would fundamentally change the way the Internal Revenue Service (IRS) treats tips received by service workers. Under current tax law, tips—whether paid in cash, added to a credit card charge, or distributed through tip pooling—are treated as taxable income. Service workers are required to report all tips to their employers, who then include them in federal income tax withholdings. For many low- to middle-income earners, this means that even the discretionary income customers voluntarily leave for good service is subject to taxation.
The “No Tax on Tips Act” proposes to eliminate that burden. It would exempt all direct tips from federal income tax, allowing workers to keep every dollar they earn in gratuities. The bill specifically defines “tips” as voluntary payments given directly by a customer to an employee, as opposed to wages, bonuses, or mandatory service charges. Tips would still need to be reported, but they would no longer be taxable under federal law.
This change is especially significant for the service and hospitality industries, which collectively employ tens of millions of Americans. From restaurant servers and hotel housekeepers to baristas, bartenders, valets, delivery drivers, and rideshare operators, many workers in these industries earn base pay well below the federal minimum wage, with the assumption that tips will supplement their income. For example, under federal law, tipped employees can be paid as little as $2.13 per hour in direct wages, provided that their tips bring them up to the federal minimum wage threshold of $7.25 per hour.
Senator Cruz, speaking at a press conference following the Senate vote, described the bill as “a simple, common-sense way to support hardworking Americans.” He added, “These are individuals who work late hours, weekends, holidays—who live off the generosity of their customers. In today’s economy, every dollar matters. This bill ensures that tipped workers can keep more of what they earn without Uncle Sam taking a cut.”
Senator Rosen emphasized the importance of the bill for states like Nevada, where tourism is a critical part of the economy. “Hospitality workers form the backbone of our state’s workforce,” she said. “For many of them, tips aren’t extra—they are essential. This legislation brings fairness to the tax code by recognizing that voluntary gratuities should go directly to the worker, not the federal government.”
Beyond its potential to increase take-home pay for workers, the legislation is expected to reduce administrative burdens on employers, particularly small businesses. Under current rules, businesses are required to track, report, and withhold taxes on tips—tasks that can be complicated, especially in cash-heavy environments. If the bill becomes law, employers will no longer need to withhold federal income tax from reported tips, which could streamline payroll operations and lower compliance costs.
The bill also provides additional clarity around what types of compensation remain taxable. While direct tips would be tax-exempt, other forms of compensation—such as base wages, automatic gratuities included in a bill, service charges, and employer bonuses—would remain fully subject to federal taxation. This distinction is intended to prevent abuse of the system while preserving the bill’s original intent of benefiting frontline service workers.
The legislation is currently headed to the House of Representatives, where early indications suggest it may also garner broad support. Several House members, including both Republicans and Democrats from districts with large service sector populations, have already expressed their intent to support the bill. President Biden has not yet publicly commented on the measure, but analysts note that given the Senate’s unanimous approval, vetoing the bill could be politically risky.
The proposal has received enthusiastic support from a variety of groups, including labor unions, small business associations, and industry advocacy organizations. The National Restaurant Association, for instance, issued a statement praising the bill for “helping workers keep more of their earnings while reducing burdens on employers,” and urged the House to act swiftly.
Critics, however, have raised concerns about potential revenue losses for the federal government. Some tax policy experts estimate that exempting tip income could reduce federal tax revenues by several billion dollars annually. Proponents argue that the benefits far outweigh the costs, pointing to increased worker spending power and improved economic mobility as potential long-term gains.
The broader context for this legislation is the ongoing national debate over wage inequality, tax fairness, and the rising cost of living. Inflation, housing costs, and economic insecurity continue to challenge American workers, particularly those in lower-paying jobs. By eliminating federal taxes on tip income, lawmakers aim to provide immediate, tangible relief without waiting for broader—and often more politically divisive—overhauls to the federal tax code.
The “No Tax on Tips Act” may ultimately signal a shift in how lawmakers approach support for hourly and gig-economy workers. While issues such as minimum wage increases and labor protections remain contentious in Congress, this bill suggests there is common ground to be found when the focus is narrowed to practical, targeted reforms.
As the bill moves to the House and continues to gain national attention, supporters are hopeful that it will not only pass into law but serve as a model for future legislation that centers the financial needs of working-class Americans.
