No Tax on Tips—But With a Catch

May 21 , 2025

Washington, DC - In a rare show of bipartisan unity, Congress has passed the “No Tax on Tips Act,” delivering on a major campaign promise of President Donald Trump. The legislation, which sailed through the Senate in a unanimous 100-0 vote, will exempt many service workers’ tips from federal income tax—but with a significant caveat: only cash tips will qualify for the tax break.

The new law establishes a tax deduction of up to $25,000 for tips, but it is strictly limited to cash gratuities that are reported by employees to their employers for payroll tax purposes. Workers earning more than $160,000 a year in 2025 are excluded from the deduction, with the income threshold set to rise with inflation.

Tips received through point-of-sale electronic readers—such as those added to credit or debit card transactions—will remain subject to federal income tax. This distinction means that while the law is a significant win for workers who receive cash tips, the growing number of employees who rely on digital payments will not see the same benefit.

How It Works

Only cash tips (including those reported for payroll purposes) are exempt from federal income tax.
Tips paid via credit or debit cards, or through electronic readers, are still taxable income.
The deduction is capped at $25,000 per year and is only available to employees in traditionally tipped occupations.
Workers earning above the income threshold are not eligible for the deduction.

The bill’s passage fulfills a high-profile pledge made by Trump during his 2024 campaign, particularly resonating in states with large service sectors like Nevada. Senator Ted Cruz (R-Texas), who introduced the bill, praised the bipartisan effort, noting the measure’s potential to provide immediate financial relief to millions of tipped workers.

Democratic support was crucial, with Nevada Senator Jacky Rosen leading the push on the Senate floor. “Nevada has the highest number of tipped workers per capita in the nation, so this bill will provide immediate financial assistance to numerous hardworking families,” Rosen said.

While many hospitality unions and worker advocates welcomed the change as overdue relief for low-wage workers, some tax experts and progressive groups criticized the measure for its limited scope. Critics argue that the bill’s benefits are modest compared to broader proposals like expanding the child tax credit or earned income tax credit.

There are also concerns that the cash-only provision could encourage more under-the-table transactions or create confusion for workers who receive both cash and electronic tips.

The bill now heads to the House, where it is expected to pass and be signed into law by President Trump. If enacted, the law will take effect for the 2025 tax year, making this year’s tips a little sweeter for some—but not all—service workers.

Congress has approved a major tax break for tipped workers, but only for those who receive and report cash tips. As digital payments become the norm, many service employees may find themselves left out of the new tax relief, highlighting the evolving—and sometimes uneven—landscape of compensation in the service industry2 6.

Olivia Asher