On May 20, 2025, the Senate unanimously passed S. 129, the No Tax on Tips Act (the “Senate Bill”) which differs in several substantive ways from the “No Tax on Tips” provision included the House reconciliation bill (H.R. 1) passed by the House of Representatives (the “House Bill”) (see prior coverage). As with the House Bill, the Senate Bill provides an above-the-line deduction for “qualified tips” received by an individual in the course of such individual’s employment in an occupation in which tips are customary. It also extends availability of the FICA tip tax credit under section 45B of the Internal Revenue Code to employers within the beauty service industry. Below, we summarize the major substantive differences between the Senate Bill and the House Bill.
Maximum Deductible Amount. The Senate Bill imposes a maximum deductible amount of $25,000 for each taxpayer. In contrast, the House Bill, did not contain a cap on the amount of tips that could be deductible.
Qualified Tips. The Senate Bill defines “qualified tips” that may be deducted from a taxpayer’s income somewhat differently than the House Bill. In one of the biggest differences, the Senate Bill imposes a requirement that the tip be received in the course of the recipient’s employment. In other words, self-employed individuals would be ineligible for the deduction. This would have ramifications for gig economy workers such as rideshare and food delivery drivers. It would also affect independent contractors in more traditional industries such as taxi drivers, limo drivers, massage therapists, and hair stylists.
The Senate Bill takes a simpler approach to defining “tips” than the House Bill: it doesn’t define “tip” at all. In contrast, the House Bill provided that a qualified tip must be “paid voluntarily without any consequences in the event of non-payment, is not the subject of negotiation, and is determined by the payor.” The definition in the House Bill generally reflects long-standing IRS and Treasury guidance on the definition of tips, and it is likely that if the Senate Bill were to be enacted, the same elements would be required for an amount to be considered a tip making this a distinction without much difference.
The Senate Bill also takes a simpler approach to limiting the occupations in which an individual may work and receive qualified tips eligible for the deduction. Unlike the House Bill, which disallows the deduction for “tips” received working in specified service trades or businesses (as defined in section 199A(d)(2)), the Senate Bill would allow the deduction only for those employed in an occupation that “traditionally and customarily receive tips on or before December 31, 2023, as provided by the Secretary.” The Senate Bill would instruct Treasury to publish a list of such occupations within 90 days of enactment. The House Bill included similar authorization.
The Senate Bill retained the House Bill’s requirement that, to receive qualified tips, an individual claiming the deduction cannot receive compensation from the employer in excess of the inflation-adjusted limit for highly compensated employees ($160,000 for 2025).
Information Reporting Requirements. Under the House Bill, new information reporting requirements would be enacted for Forms W-2, 1099-NEC, 1099-K, and 1099-MISC, to report the number of tips paid to an individual. Because the Senate Bill limits tips only to employees, it relies on existing reporting requirements under section 6053. Under that section, employees receiving cash tips of $20 or more during a calendar month must report those tips to their employer. The deduction under section 224 would be available only for qualified tips that are reported to the employer as required under section 6053.
No Social Security Number Requirement. Under the House Bill, the deduction could only be claimed if the taxpayer provided its social security number on its tax return. The Senate Bill contains no such requirement. Because the deduction is available only to employees and employees are generally required to have a Social Security Number, this requirement is still a practical requirement to some extent. (The House Bill does, however, require the taxpayer’s spouse to have a Social Security Number, which is a meaningful difference.)
Delegations to Treasury. While the Senate Bill continues to direct Treasury to publish a list of occupations in which tips are traditionally and customarily received, the Senate Bill does not retain other delegatory provisions contained in the House Bill. For example, the House Bill authorized Treasury to promulgate anti-abuse regulations, as well as additional requirements for qualified tips. The Senate Bill removed those provisions.
Applicability Period. As with the House Bill, the Senate Bill provides that the deduction is available for taxable years beginning after December 31, 2024. However, the Senate Bill does not contain a sunset provision. While the deduction under the House Bill would expire after 2028, the Senate Bill appears to make the deduction permanent.
We will continue to monitor the stand-alone legislation as well as the provision in the reconciliation bill for developments.