No Income Tax Tips Provision Moving Forward at the State and Federal Level

Efforts to eliminate state and federal income taxes on tips are moving forward at both the state and federal level. Provisions to eliminate income taxes on tips are included in the House of Representatives budget reconciliation bill and earlier this week the Senate passed the No Tax on Tips bill authored by Senator Ted Cruz, R-Texas. On the state level, SB 36, a bill authored by Senator Andre Jacque and Representative Ron Tussler, to eliminate state income tax on tips had a hearing in Senate Agriculture and Revenue Committee.

Eliminating income taxes on tips would put cash back in the pocket of a significant number of workers in the restaurant and hospitality industry and could help restaurant operators recruit the industry workforce. A no tax on tips bill is sensible legislation that will support our employees.

What is in the two federal bills?
US Senate unanimously passed a bipartisan federal No Tax on Tips bill, which includes protections for both restaurants and employees relating to the FICA tip tax credit, as well as still requiring employee contributions to Social Security, unemployment insurance and Medicare. All tips would need to be reported, even though income tax would not be deducted.

This is a very important component for our industry. It is critical for employees to demonstrate income to build credit and pay into federal benefit programs through FICA contributions. The Senate passed bill’s “no tax” provision applies to the first $25,000 earned in tips and restaurant operators must continue working with the Internal Revenue Service (IRS) to accurately report tips through current compliance efforts. The FICA tip credit (Sec. 45B of the federal tax code) and federal tip pooling requirements do not change.

The current House reconciliation bill also has a “no tax on tips” provision, but it sunsets in 2028 and there is no income limit until a person earns more than $151,000.

Two key components of both federal bills relate to how tips are defined and what occupations can take advantage of exemption.  The US Treasury Department will determine the traditionally tipped industries, which will include restaurants and hospitality. Cash tips are defined to include all voluntary tips received from customers, including charged tips (for example, credit and debit card charges) and tips received from other employees under any tip-sharing arrangement. Service charges, which are not voluntary payments by customers, are currently not counted as tips and that will continue under both bills.

​How about the state bill?
SB 36 simply eliminates state income tax on tips, by striking the word "tips" in state statutes relating to income tax. The definition of tips is not the same as the federal bills and other provisions in the federal bill are not addressed. At the state committee hearing, the WRA testified in support of SB 36, but asked the committee to consider amendments to the bill to mirror the federal tax treatment in Wisconsin. Having two different tax treatments would overcomplicate payroll calculations and create problems for restaurant operators.

WRA will keep update this alert page as these bills move forward at the state and federal level.