The "Tipped Income Protection and Support Act" eliminates the lower minimum wage for tipped employees, ensuring they receive the standard minimum wage while retaining all tips, and introduces a tax deduction for reported cash tips for eligible employees.
Steven Horsford
Representative
NV-4
The Tipped Income Protection and Support (TIPS) Act eliminates the subminimum wage for tipped employees, requiring employers to pay the standard minimum wage before tips. It ensures that all tips go to the employees, allowing for traditional tip pooling. The bill also introduces a tax deduction for qualified cash tips for employees earning up to $112,500 annually, effective for taxable years after 2025.
TIPS Act Ends Subminimum Wage for Tipped Workers, Offers New Tax Breaks: Starts 2026
The "Tipped Income Protection and Support Act," or TIPS Act, is shaking up how tipped workers get paid. Starting after December 31, 2025, this bill does away with the lower minimum wage for tipped employees, guaranteeing them the same base pay as everyone else. Plus, it throws in a new tax break for many tipped workers.
Straight to the Bank
This bill makes two major changes:
- Equal Base Pay: The TIPS Act gets rid of the separate, lower minimum wage for tipped workers. This means employers have to pay the full federal minimum wage before tips. (SEC. 2)
- Tax Break on Tips: If you make under $112,500 a year, you get a tax deduction for the cash tips you report to your employer. This applies to folks in jobs like restaurants, salons, hotels, valet parking, and cleaning services. (SEC. 3)
Cash in Hand, Taxes in Mind
Let's say you're a server making the current tipped minimum wage in some states ($2.13/hour). Under the TIPS Act, your boss has to pay you the regular minimum wage (currently $7.25/hour, but subject to change). That's a big jump in your hourly rate, before tips.
Or, picture a hairstylist who reports $10,000 in cash tips annually. If their total income is under $112,500, that $10,000 is now deductible. This means they pay taxes on less income, potentially saving them money come tax time. The IRS will update withholding tables to reflect this, so you should see the difference in your paychecks. (SEC. 3)
Keeping it Fair
The law makes it clear that tips belong to the employees. The only exception is for legit tip pools where employees who usually get tips share them. (SEC. 2) The bill also increases penalties on employers who illegally keep or misuse employee tips. (SEC. 2)
The Bottom Line
The TIPS Act is a significant shift for tipped workers. It aims for fairer wages and offers some tax relief, but it means big changes for how businesses operate. It could mean higher menu prices, and there is a risk that some employers may try to reclassify non-tipped positions as tipped to take advantage of tip pooling, or that employees may underreport cash tips to stay below the adjusted gross income threshold for the tax deduction. But, overall, the TIPS Act aims to put more money in the pockets of the people who rely on tips to make a living.