How Will the No Tax on Tips Act Affect Employers?

 Posted on May 30, 2025 in Employment Taxes

During the 2024 presidential campaign, Donald Trump promised to eliminate taxes on the tips earned by certain workers, such as restaurant servers or hair stylists. Since Trump assumed office for his second presidential term, Congress has taken steps to fulfill this promise. If new laws are passed eliminating taxes on tips, this may affect both employees who earn tips and employers who are required to withhold payroll taxes.

Understanding how changes to the law may affect employment taxes will be important for small businesses and other employers. Small business owners and other employers can consult with a tax attorney to make sure they are meeting their legal requirements and will be taking the correct steps to avoid potential penalties or other tax consequences.

Understanding the No Tax on Tips Act

In May 2024, the U.S. Senate passed the No Tax on Tips Act. Provisions eliminating taxes on tips were also included in a tax reform bill passed by the U.S. House of Representatives. If either of these bills is signed into law, they will affect workers who receive cash tips, potentially lowering the income taxes they will be required to pay.

Rather than fully eliminating taxes on tips, the proposed laws provide deductions that can be claimed, up to a total of $25,000 per year. These deductions will be available to workers who earn less than $160,000 per year, with this amount being adjusted annually based on inflation rates. Deductions will only be available to workers in certain occupations, which will be determined through a list published by the administration of President Trump.

How Employers May Be Affected

Because the proposed new laws provide tax deductions for workers who earn tips rather than eliminating these taxes entirely, employers will still be required to withhold payroll taxes from wages paid to employees and pay these taxes to the IRS. Employees who earn at least $20 in tips in a month are required to report all cash tips they receive to their employers, and the taxes withheld are based on the amounts reported. In addition to income taxes, Medicare and Social Security taxes will also be withheld.

Tax policy experts do not believe that these proposed laws will affect as many people as lawmakers claim. They have noted that while there are around four million workers in the United States who earn tips, making up around 2.5% of all employees, around 40% of these workers do not earn enough to pay federal income taxes, so they will not benefit from the ability to deduct taxes on tips. They have also raised concerns that employers may classify more employees as tipped workers in order to pay lower hourly wages or that some people may claim that income they have earned consists of tips in order to take advantage of the tax deduction.

Because this will be an area that is likely to receive increased scrutiny, it is important for employers to maintain proper records of the tips reported by employees, the hourly wages they have paid, and the payroll taxes that have been withheld. If the IRS performs tax audits to examine an employer’s records and tax withholding practices, these records can be invaluable. Representation from a skilled attorney can also be essential during an audit to ensure that an employer will be treated fairly by IRS officials.

Contact Our San Jose Employment Tax Attorney

If you have questions about how changes to tax laws may affect your business, John D. Teter Law Offices can provide you with answers. Our San Jose, CA tax lawyer can help ensure that you take the correct steps to avoid IRS penalties or other potential tax issues, and we can also advocate on your behalf when dealing with the IRS to help resolve tax audits or other queries. Set up a consultation today by contacting us at 408-866-1810.