This bill creates a temporary exclusion from federal gross income for many amounts received as tips while performing tip-reliant work. It excludes some tipped income from income tax for a limited period and requires Treasury to adjust withholding procedures to reflect the change.
The measure is narrowly targeted at occupations that “generally rely on tips,” and it includes a built-in expiration. The change would immediately affect how employers, payroll providers, and tax-preparers handle tip reporting and withholding, and it shifts the near-term tax liabilities of tipped workers and federal receipts for the duration of the exclusion.
At a Glance
What It Does
The bill adds a new Internal Revenue Code section (139J) that excludes from gross income up to $20,000 of "eligible tips" per individual per taxable year. It defines eligible tips by category (for example, cosmetology, hospitality, and food service), disallows using excluded amounts to claim most other tax benefits, and sunsets the exclusion after five years. The Secretary of the Treasury must modify withholding tables and procedures to reflect the exclusion.
Who It Affects
Frontline service workers who receive tips (e.g., restaurant servers, bartenders, salon cosmetologists, hotel staff) are the primary beneficiaries. Employers, payroll vendors, and tax-preparers will face changed reporting and withholding requirements. The federal government bears the direct budgetary impact and increased administrative workload for implementing withholding changes.
Why It Matters
The proposal changes take-home pay calculations and could alter behavioral incentives in tip reporting and compensation arrangements. It creates a temporary carve-out in the income tax base that interacts with refundable credits (the bill explicitly treats the exclusion as includible for Child Tax Credit and Earned Income Credit calculations), and it imposes immediate operational changes on payroll systems.
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What This Bill Actually Does
The bill inserts a new section into the Internal Revenue Code that excludes a portion of tips from federal gross income for a limited period. The exclusion is written as a subtraction from gross income, up to a per-individual annual cap, and applies to amounts received while performing services in positions that typically rely on tips.
The statute lists examples of qualifying industries to guide interpretation.
Mechanically, the bill also addresses two implementation points: it instructs Treasury to alter the withholding tables and procedures under section 3402 so that employers withhold federal income tax net of the excluded tips, and it adds a clerical table entry so the new section appears in the code's index. The bill does not itself amend payroll-tax statutes (FICA/Medicare) or other provisions; it operates solely by excluding eligible tips from gross income and by specifying how that exclusion interacts with deductions and credits.On interactions with credits and deductions, the bill bars taxpayers from using amounts excluded under the new section to claim other deductions or credits under the Code, with one explicit exception: the excluded amounts must still be counted when calculating the Child Tax Credit and the Earned Income Credit.
The statute includes a termination clause that automatically ends the exclusion for tips received after the five-year window, and it sets the effective date to apply to amounts received after December 31, 2024.Operationally, employers and payroll service providers will need to change withholding workflows and employee communications so that income-tax withholding reflects the exclusion while other obligations — notably payroll taxes — remain subject to the preexisting rules unless separately changed by Congress. Tax-return preparers and software vendors will need to update forms and guidance to reflect the exclusion, the special rule on credits, and reporting conventions for tipped wages that remain taxable for other purposes.
The Five Things You Need to Know
The bill excludes up to $20,000 of eligible tips from an individual’s federal gross income in a taxable year.
It defines “eligible tips” to include amounts received in positions that generally rely on tips, explicitly naming cosmetology, hospitality, and food service as examples.
Amounts excluded under the new section cannot be used to claim other tax deductions or credits except that excluded tips must still be counted for the Child Tax Credit (sec. 24) and the Earned Income Credit (sec. 32).
The Secretary of the Treasury must modify federal income-tax withholding tables and procedures (under section 3402) to reflect the exclusion.
The exclusion applies to amounts received after December 31, 2024, and terminates for tips received after December 31, 2029 (a five-year window).
Section-by-Section Breakdown
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Short title
Provides the statute's short name: the 'Tip Tax Termination Act.' This is purely nominal but signals the bill's temporary design — an important interpretive cue when agencies and practitioners consider implementation and communications.
Exclusion of eligible tips from gross income
Creates the core rule excluding from gross income 'so much of the eligible tips' received during the taxable year as does not exceed $20,000. Practically, this operates as a direct reduction to taxable income rather than a credit or rate change, changing taxpayers’ AGI and taxable-income calculations for years the exclusion applies.
Definition of eligible tips
Defines 'eligible tips' as amounts received while performing services in positions that generally rely on tips, and gives examples—cosmetology, hospitality, and food service. The statutory definition is categorical but not exhaustive; that ambiguity will leave room for Treasury guidance on borderline occupations and mixed jobs where tipped and non-tipped duties coexist.
Denial of double benefit and explicit credit exceptions
Bars taxpayers from using excluded amounts to claim other deductions or credits under the Code, preventing double-counting of tax benefits. It provides an explicit carve-out requiring that excluded tips still be included when calculating the Child Tax Credit and the Earned Income Credit, which increases the likelihood those refundable credits will rise for some recipients but also raises the fiscal cost of the exclusion.
Sunset and effective date
Imposes a statutory termination: the exclusion ceases to apply to tips received after December 31, 2029, and the amendments apply to amounts received after December 31, 2024. The five-year window creates a built-in phase-out date that employers and payroll systems must plan for, and it creates a cliff in tax treatment that practitioners should model for affected workers.
Treasury directed to change withholding tables and procedures
Directs the Secretary of the Treasury (or delegate) to modify the withholding tables and procedures under section 3402 so withholding reflects amounts excludable under the new section. This requires administrative action: updating IRS publications, employer payroll instructions, and withholding-calculation logic in payroll software to avoid over- or under-withholding of federal income tax during the exclusion period.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Tipped workers in food service, hospitality, and cosmetology — the exclusion raises after-tax take-home pay by removing up to $20,000 of tips from taxable income, directly increasing disposable income for eligible individuals during the five-year window.
- Employers in tip-intensive businesses — potentially easier recruitment and retention when employers can point to higher net pay for tipped roles; indirect business benefits could include reduced wage pressure if tips are more valuable net of income tax.
- Recipients of refundable credits who also receive tips — because the exclusion must be counted for Child Tax Credit and Earned Income Credit calculations, some low- and moderate-income tipped workers could see larger refundable credits or eligibility where previously they might not have qualified.
Who Bears the Cost
- The U.S. Treasury — excluding tipped income shrinks the income-tax base and increases outlays for refundable credits that rise as a consequence, creating an identifiable revenue loss over the five-year period.
- Employers and payroll processors — must implement withholding-table changes, update software and payroll procedures, and communicate the changes to employees and tax preparers, incurring implementation costs and potential compliance risk.
- Payroll-tax administration and benefits programs — because the bill does not change payroll-tax treatment (FICA/Medicare) or many benefits formulas, administrative complexity rises; agencies and employers must reconcile different tax treatments for the same wage components.
Key Issues
The Core Tension
The bill balances an immediate, targeted tax relief for tipped workers against fiscal cost and administrative complexity: it aims to increase take-home pay for a vulnerable workforce but does so by carving out a portion of income from the tax base (and from most other tax benefits), which reduces revenues and complicates withholding and payroll-tax administration—with no change to payroll-tax liabilities and only a temporary window before a hard sunset.
The bill creates a targeted, time-limited break for tipped income but leaves several practical and policy questions unresolved. First, the statutory definition of "eligible tips" is categorical yet porous: naming cosmetology, hospitality, and food service helps but does not resolve mixed-role cases (for example, a salon receptionist or a restaurant manager who sometimes receives tips).
Treasury guidance will be needed to set boundaries and prevent divergent filing practices.
Second, the exclusion addresses only federal income tax treatment and explicitly directs changes to income-tax withholding tables; it does not amend payroll-tax statutes or Social Security/Medicare rules. That split treatment—income-tax exclusion but unchanged FICA liability—will produce reporting mismatches on W-2s and could confuse workers who see different tax bases for income and payroll taxes.
Employers and payroll vendors face a nontrivial operational lift to reconcile these differing obligations while avoiding withholding errors.
Finally, the bill's exception that excluded tips count for Child Tax Credit and Earned Income Credit calculations increases benefit payments for some households but adds fiscal cost and could create counterintuitive distributional effects. The five-year sunset reduces long-term budget uncertainty but introduces a cliff that may produce sharp behavioral responses near the termination date and complicates both employer planning and worker expectations.
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