No Tax on Tips

WASHINGTON — A growing movement to eliminate federal income tax on tipped wages is gaining traction, sparking both celebration and debate across America’s service economy.

The proposal—unofficially dubbed the “No Tax on Tips Act”—has been endorsed by several lawmakers in Congress and touted by political figures as a way to support restaurant workers, bartenders, hotel staff, and others who rely heavily on gratuities to make ends meet. The idea is simple: workers would no longer pay federal income tax on the tips they receive from customers, provided those tips are voluntarily given and properly reported.

For Maria Castillo, a waitress in Nashville, the change couldn’t come soon enough.

“Right now, I live off my tips,” Castillo said during a break between lunch and dinner shifts. “But at tax time, I still owe hundreds of dollars. It feels like I’m being penalized for doing a good job.”

Maria, like many in the service industry, earns a base wage below the standard minimum wage—just $2.13 an hour in Tennessee. Her income depends on tips. While some are paid in cash and others are digitally recorded, all are considered taxable income by the IRS.

If passed, the new law would exempt those tips from federal income tax, similar to how certain benefits and allowances are treated for other professions. Supporters argue it’s a long-overdue recognition of the unique challenges service workers face.

“Tips are a form of appreciation, not guaranteed salary,” said Senator Rick Whitmore (R-TX), a leading sponsor of the bill. “It’s time the tax code caught up with the reality of millions of working Americans who keep this country running.”

But not everyone is cheering. Critics warn that the proposal could open the door to widespread underreporting and abuse.

“It’s not just a tax break—it’s a tracking nightmare,” said Lily Chen, a former IRS auditor and current policy analyst. “Unless there’s a reliable way to verify tip amounts, we’re relying on an honor system that’s already shaky at best.”

Restaurant owners are also divided. Some see it as a potential morale booster for staff and a marketing tool to attract new hires in a still-tight labor market.

“If I can say, ‘Your tips aren’t taxed,’ that’s a powerful recruitment message,” said Daniel Lee, who owns a chain of diners across Ohio and Indiana. “But it’s also one more thing to manage, and we’re already dealing with a mountain of compliance paperwork.”

Others worry it may create confusion among workers, especially those juggling multiple jobs or unfamiliar with tax filing rules.

“If you think tips aren’t taxed, and you underreport, you might still get audited,” said CPA and tax advisor Jenna Morales. “We’d need a very clear, standardized system.”

Support for the idea has been amplified on social media, especially on platforms like TikTok and Instagram, where service workers have posted videos breaking down their paychecks and showing just how little they take home after taxes.

The proposal has also sparked discussions about fairness across professions. Some ask why tipped workers should get a break, while salaried workers don’t.

“It’s not that we want to be treated better,” said bartender Alex Reilly from Denver. “We just want to stop being treated worse.”

According to the Bureau of Labor Statistics, over 4.3 million Americans work in tipped occupations. Most of them fall in lower income brackets, and many lack employer-provided benefits. The IRS currently requires tipped workers to report tips as income, and employers must withhold federal taxes accordingly.

President Biden has not formally endorsed the proposal, but White House officials said they are “reviewing the potential impact on both workers and tax revenue.” Meanwhile, economists estimate that exempting tips could cost the federal government between $1.7 and $2.4 billion annually.

Still, for workers like Maria Castillo, that money makes a world of difference.

“I just want to be able to take home what I’ve earned,” she said. “Every dollar matters.”