[co-author: Stephanie Radcliff, Law Clerk]
On May 20, 2025, the No Tax on Tips Act, a standalone bill that would effectively exempt up to $25,000 in tips from federal income tax for certain workers, passed by unanimous consent in the Senate.[1] Shortly thereafter, on May 22, 2025, the One Big Beautiful Bill Act (OBBBA), a reconciliation package that provides temporary federal income tax deductions for qualified tips and overtime, passed by one vote in the House.[2] As the No Tax on Tips Act and the OBBBA make their respective ways through Congress, employers in the service industry are encouraged to consider the effects the passage of either bill could have on operations and employees.
As the title, One Big Beautiful Bill Act, conveys, the “no tax on tips” provision is part of a much larger legislative proposal. However, when focusing solely on the tax deductions for tips provisions of the OBBBA, those provisions and the No Tax on Tips Act contain some similar language. Both bills allow for a tax deduction on tips for workers making up to $160,000 a year in an occupation that has “traditionally and customarily” received tips. It is important to note that the tax deduction for tips applies only to federal income tax, meaning employees would still pay Medicare, Social Security, state, and local taxes. Both bills also extend the employer tax credit for Social Security taxes paid on tips, which is currently reserved only for restaurants, to beauty service establishments.
There are a few key differences between the House and Senate bills, however. Most notably, the OBBBA proposes excluding premium overtime pay from gross income for federal income tax purposes, while the No Tax on Tips Act has no such provision. However, the No Tax on Tips Act proposes permanent changes, allowing eligible employees to deduct up to $25,000 a year in tips beginning with the 2025 tax year. In contrast, the OBBBA tax deductions would be temporary, applying retroactively to the beginning of 2025 and expiring at the end of 2028. Although the OBBBA provisions would only be temporary, they do not limit the amount of tipped income or overtime pay that workers can deduct each year like the No Tax on Tips Act does for tipped income.
Neither bill creates an exclusion of income subject to withholding, therefore, tips and overtime wages would remain subject to federal income tax withholding. As such, employers would continue reporting tips and overtime wages on Form W-2. Under both bills, however, employers would be required to report these amounts separately on Form W-2. As such, employers are encouraged to review how their payroll systems track tipped income, overtime wages, and taxable wages to stay ahead of the potential changes. In addition, employers can expect to receive updated Form W-4s from employees to reflect reductions in their federal income tax withholding. Lastly, both bills provide an opportunity for hospitality employers to consider changes in their compensation structures with respect to base compensation and tip pooling, and to further recruitment and retention efforts.
As a standalone bill with bipartisan support, the No Tax on Tips Act is predicted to pass in the House. The OBBBA, however, is expected to receive amendments in the Senate where both Republican and Democratic Senators have indicated a desire for changes in the sprawling bill. As a reconciliation bill, the OBBBA only needs a simple majority in the Senate to pass. If either bill is passed, Maynard Nexsen’s labor and employment attorneys stand ready to provide counsel and additional information to employers regarding the impacts both bills may have on employers, as well as any other labor and employment issues.
[1] S. 129, 119th Cong. (2025).
[2] H.R. 1, 119th Cong. (2025).
