The "No Tax on Tips Act" allows an above-the-line tax deduction for up to $25,000 in qualified tips for traditionally tipped occupations and extends the employer social security tax credit to beauty service establishments, effective for taxable years beginning after December 31, 2024.
Vern Buchanan
Representative
FL-16
The "No Tax on Tips Act" allows an above-the-line tax deduction for up to $25,000 in qualified tips for workers in traditionally tipped occupations, excluding higher-income earners. It also extends the employer social security tax credit to include beauty service establishments, aiming to reduce the tax burden on tipped workers and incentivize accurate tip reporting. This goes into effect for taxable years beginning after December 31, 2024.
No Tax on Tips Act: Up to $25,000 in Tip Income Could Be Deductible, Starting 2025
The "No Tax on Tips Act" aims to give tipped workers a tax break and offer some relief to beauty businesses. Here's the deal: starting in 2025, if you earn tips, you might be able to deduct up to $25,000 of that income from your taxes. Plus, beauty service establishments—think salons and spas—get a tax credit for the Social Security taxes they pay on employee tips.
Tip Money, Tax Free?
This bill lets certain tipped employees deduct up to $25,000 in qualified tips from their taxable income (SEC. 2). So, if you're a waiter, bartender, or in another job the government defines as "traditionally tipped," you could see a smaller tax bill. The catch? The Secretary of the Treasury gets to decide which jobs make the cut. They're supposed to publish a list of these 'traditional' tipped occupations within 90 days of the Act becoming law (SEC. 2). One thing to note: if your total compensation from your employer was high enough in the previous year (the bill references section 414(q)(1)(B)(i), which for 2024 is $155,000), you won't qualify for this deduction. For example, a high-earning restaurant manager who occasionally receives a share of the tip pool might not be eligible, while their serving staff likely would be.
Beauty Biz Boost
Beyond the tip deduction, the bill also throws a bone to beauty service businesses (SEC. 3). These establishments—barber shops, nail salons, spas—can now get a tax credit for the Social Security taxes they pay on their employees' tips. This is similar to a credit already available to food and beverage establishments. One key difference, though: for food/beverage businesses, the minimum wage used to calculate this credit is stuck at the 2007 rate (SEC. 3), while other businesses use the current minimum wage. This detail could make the calculation a bit more complicated for restaurant owners.
Real-World Rollout
How does this play out? Imagine a hairstylist who makes $30,000 in base salary and $20,000 in tips in 2025. Under this law, they could potentially deduct that entire $20,000, significantly lowering their taxable income. Their salon owner also benefits from the expanded tax credit, potentially freeing up cash for other business needs. However, there's also room for things to get tricky. The $25,000 cap could end up benefiting higher-earning tipped workers more. And, the fact that the Treasury Secretary gets to define "traditional" tipped jobs could lead to some debate and potentially some arbitrary calls. Also, the income cap from the prior year might discourage raises – if your total pay gets too high, you lose the deduction on your tips. Finally, while this bill intends to simplify taxes, it undeniably adds new layers of rules, especially with the differing minimum wage calculations for the tax credit.