Understanding the "No Tax on Tips Act": A Closer Look for Service Workers

In a rare moment of bipartisan agreement, the Senate has unanimously passed the "No Tax on Tips Act," bringing a glimmer of hope to service workers across America. This legislation allows for a tax deduction on tips, offering up to $25,000 for workers earning under $160,000 as of 2025—an amount likely to increase with inflation over the years. However, there’s a significant caveat that service workers need to be aware of.

A Silver Lining with a Dark Cloud

While this new bill is celebrated, it’s important to note that it applies exclusively to cash tips. The unfortunate reality is that many service workers, often underpaid and reliant on tips, frequently underreport their cash earnings. This legislation seems to be aimed at encouraging proper reporting to the IRS, ensuring that the government keeps tabs on every cent exchanged, rather than genuinely alleviating the burdens of tipping culture.

The Treasury Inspector General for Tax Administration (TIGTA) reported in 2018 that a staggering 52% of total tips go unreported, costing the IRS an estimated $44 billion annually. Workers in personal services and food services, who often earn less than minimum wage and heavily rely on tips, are primarily responsible for this gap in compliance. According to the IRS, tips account for 10% of the total individual income tax underreporting gap, indicating a serious issue at hand.

The Change in Reporting Requirements

Previously, workers were required to report any tips exceeding $20 per month. Failure to report could lead to steep penalties, including a 50% charge on Social Security and Medicare taxes owed on the underreported tips. However, the reality is that the IRS rarely pursues individuals who fail to comply. The same TIGTA report found that only 34 tip examinations were conducted in FY 2026, despite estimates that 15,000 employers were withholding around $6.3 billion in tip income. Over the span from 2013 to 2027, just 262 tip examinations were completed, primarily on a voluntary basis.

Impact on the Digital Tipping Revolution

Interestingly, workers in ride-share industries and other digital platforms won’t see any benefits from this new law. As tipping culture evolves, especially with the advent of POS monitors prompting tips for services that may not warrant them, service workers are left navigating a complex and often frustrating landscape. Research indicates that as much as 90% of Americans perceive tipping culture as “out of control,” with 66% maintaining a negative view of the system. A staggering 83% of respondents support transitioning to mandatory service fees.

This sentiment highlights a critical cultural shift; many believe that the responsibility of employee compensation has shifted unfairly onto the customer. Yet, a mere 25% of Americans support taxing tips, demonstrating a disconnect between perceived value and financial obligation.

A Broader Perspective on Tipping Culture

The cultural implications of tipping in America stand in stark contrast to practices in other countries, where employees typically earn a living wage without relying on tips for survival. Numerous Europeans visiting the States have expressed disbelief at the tipping expectations, highlighting the sometimes absurd nature of the American system.

Conclusion: A Complex Solution to a Complex Problem

In essence, the "No Tax on Tips Act" doesn’t eliminate taxes on tips as many might think. It serves as a mechanism for the government to accurately track cash flow rather than a sincere solution to the struggles of service workers grappling with rising living costs. This legislation is just another reminder that while governments seek every avenue for taxation, the plight of service workers remains complex and often overlooked.

At Extreme Investor Network, we advocate for informed discussion and potential reform in the service industry, encouraging our readers to engage critically with legislation that directly affects their livelihoods. Understanding the nuances of such bills will not only empower service workers but also enhance the broader dialogue around compensation and service in society.