As we reflect on another demanding summer season, the evolving national conversation around how hospitality workers are compensated and steps to support their long-term financial well-being is timely. Among the proposals gaining traction at the federal level is the idea of eliminating income taxes on tips.
Recently there has been significant movement on this issue. The Senate unanimously passed its version of the “No Tax on Tips Act” (S. 129) on May 20th. This bill would establish a new tax deduction of up to $25,000 for qualified tips and expand the business tax credit for payroll taxes on tips to include beauty services. It is generally limited to tips reported to employers and excludes employees with compensation exceeding $160,000 in the prior tax year. This bill was received by the House on May 26th.
Concurrently, the House of Representatives passed its own broader tax package, the “One Big Beautiful Bill Act” (H.R. 1), on May 22nd, which includes provisions for “No Tax on Tips” along with “No Tax on Overtime.” This version proposes a temporary deduction for qualified tips from 2025 through 2028 and does not include a cap on the amount of the deduction. It also expands the FICA tip tax credit to beauty service businesses. While both chambers aim to provide tax relief for tipped workers, there are key differences in their proposals.
The RI Hospitality Association sees long-term value in recognizing that tipped income is not discretionary, it is a core part of how employees are paid. Removing the federal income tax on tips would allow employees to keep more of what they earn, and that kind of predictability matters, especially in a sector where schedules and wages often fluctuate. Recruitment and retention continue to be a challenge for many operators, and improving take-home pay without increasing the financial burden on businesses is a smart, balanced step in the right direction. It is important to note that under both current proposals, Social Security and Medicare taxes on tips would still apply.
This discussion around federal taxation also highlights why the tip credit remains so important. The current system allows employers to pay a lower base wage to tipped workers, provided that tips bring the total hourly wage to at least the state minimum. Most tipped employees already earn far more than the minimum wage, and the credit gives employers flexibility in managing staffing while still ensuring workers receive fair pay.
Eliminating the tip credit, as some have proposed, would force employers to absorb significant labor cost increases while changing the earning model that so many workers prefer. When paired with federal action to preserve more of employees’ earnings, it becomes even clearer that the tip credit is a tool worth defending.
The Association will continue to advocate for policies that reward those in our industry, support growth, and reflect the real-world needs of both employees and employers. The federal proposals to end income tax on tips are an encouraging signal that lawmakers understand the role hospitality plays in the national economy and the importance of preserving employee earnings in a way that does not increase operating costs.
As these proposals move forward in Washington, potentially being reconciled into a single package, we hope it serves as the beginning of a longer-term conversation that respects the value of tipped income, protects the flexibility of the tip credit, and strengthens the workforce at the heart of the hospitality industry.
