Posted originally on May 22, 2025 by Martin Armstrong 

The “No Tax on Tips Act” passed in the Senate after a unanimous vote. At last, the Senate can agree upon one item. The legislation permits a tax deduction worth up to $25,000 for tips for workers earning under $160,000 as of 2025, with the figure expected to increase over the years along with inflation. The bill comes with a major caveat.

The measure only applies to cash tips. It is well-known that service workers often underreport or fail to report their cash earnings. There is a high probability that this measure is to ensure that workers properly report their earnings to the IRS to ensure the government can track every passing penny.

The Treasury Inspector General for Tax Administration (TIGTA) conducted a study in 2018 that found 52% of overall tips went unreported, costing the IRS an estimated $44 billion annually. The study found that personal services and food services workers—those who rely on cash tips—were most likely to in incompliance. These are the workers who are often paid under minimum wage and derive the majority of their income from tipping culture. The IRS believes that tips account for 10% of the total individual income tax underreporting gap.

The previous law required tips above $20 per month to be reported. Failure to report could equate to a 50% penalty of Social Security and Medicare taxes owed on the underreported tips. Yet, it is extremely rare for the IRS to actually hunt down individuals who fail to report. The same TIGTA report found that only 34 tip examinations were completed in FY2026, although the IRS believed 15,000 employers withheld $6.3 billion in tip income from the government. From 2013 to 2027, the IRS only completed 262 tip examinations and those mainly occurred on a voluntary basis.

Ride-share workers and others in the service industry who have gone digital will not benefit from this legislation. Tipping culture in America has crept up throughout the years, with the average tip amount coming in at 20%. Americans are asked to tip on everything with the introduction of POS monitors that often ask for a tip when service was not provided.

A recent survey found that up to 90% of Americans feel tipping culture is “out of control,” with 66% holding a negative view of the tip system. Around 83% would like to see a man on mandatory service fees. Three in five Americans (60%) believe employers have shifted the responsibility of employee compensation onto the customer. Still, only 25% of Americans felt that tips should be taxes. Tipping culture is quite different outside America where employees are paid living wages. Every European I know who has visited the States was shocked to see how much they were expected to add to their final bill.

Overall, the new legislation is not exactly a ban on taxed tips. The legislation would have banned taxes on all tips if they were truly concerned with service workers struggling with the cost of living. The Trump Administration has still failed to uphold its promise to remove taxes on overtime pay. Governments are consistently on a hunt for taxation, and this measure will simply allow the government to accurately track cash in circulation.