You've probably seen the headlines or heard the chatter while out for dinner: did they pass the no tax on tips yet? It was the viral campaign promise of 2024 that seemingly everyone—from servers at high-end steakhouses to the person handing you a latte—was talking about. But here is the thing about Washington: a slogan on a hat moves a lot faster than a bill through a committee.
As of early 2026, the answer is layered. Honestly, it’s a bit of a legislative mess. While the political will to "stop taxing tips" peaked during the last election cycle, the actual machinery of the Internal Revenue Service (IRS) and the U.S. Treasury hasn't just flipped a switch. There isn't a "zero tax" reality for every tipped worker across the board quite yet, but the landscape has shifted dramatically.
The Short Answer: Where the Law Stands
If you’re looking for a simple "yes" or "no," the answer is: not entirely. While several federal proposals like the No Tax on Tips Act were introduced with bipartisan fanfare, they haven't all survived the gauntlet of the Senate Finance Committee in their original form. What we actually have is a patchwork. Some states have moved faster than the federal government, and the IRS has issued new "guidance" that changes how small tips are reported, but the broad federal income tax on all tip earnings has not been magically deleted from the tax code.
It’s complicated.
Politics happens in stages. First, you get the promise. Then, you get the bill. Then, the CBO (Congressional Budget Office) rains on the parade by pointing out that exempting tips could cost the federal government roughly $150 billion to $250 billion over a decade. That massive price tag is why did they pass the no tax on tips became a question of "how" rather than "if."
Why the "Tip Credit" Changes Everything
You can't talk about tip taxes without talking about the subminimum wage. In many states, employers still use the "tip credit," paying as little as $2.13 an hour because the tips are expected to make up the difference.
Critics of the new tax proposals, like those at the Center on Budget and Policy Priorities, have argued that simply removing taxes on tips doesn't help the lowest earners as much as you'd think. Why? Because many low-income servers already owe little to no federal income tax after the standard deduction. The real "tax" they feel is the 7.65% payroll tax for Social Security and Medicare.
Current legislative efforts have struggled with this specific nuance. Does "no tax" mean no income tax, or does it mean no payroll tax too? If you cut the payroll tax, you’re potentially cutting that worker's future Social Security benefits. It’s a catch-22 that lawmakers are still debating behind closed doors in 2026.
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The IRS Perspective vs. The Campaign Trail
The IRS has been playing defense. For years, they’ve pushed programs like the Service Industry Tip Compliance Agreement (SITCA), which was basically a way to get employers to report tips more accurately in exchange for protection from audits.
When the "No Tax on Tips" movement went mainstream, the IRS had to pivot. They aren't in the business of losing revenue. However, under intense pressure from both sides of the aisle, there has been a significant softening in how the IRS pursues "unreported" cash tips for workers making under a certain threshold—usually around $45,000 a year. It’s not a law, but it’s a shift in enforcement that feels like a tax break to the person on the floor.
Real-World Impact for Hospitality Workers
Let’s look at a server named Maria in Nevada. Nevada was ground zero for this movement. Under the proposed shifts, if Maria clears $30,000 in tips, she could save thousands. But if the law only exempts income tax, and she already has two kids and qualifies for the Earned Income Tax Credit (EITC), her actual savings might be... zero.
This is the nuance people miss.
The wealthy diner leaving a $500 tip on a bottle of wine? They benefit immensely if that tip is tax-free. The diner server working the graveyard shift? Not so much. This "equity gap" is exactly why the question did they pass the no tax on tips doesn't have a victory lap yet.
What’s Happening at the State Level?
While D.C. bickers, the states are acting.
- Alabama: Already made moves to exempt portions of overtime pay from state taxes, which paved the way for discussions on tips.
- Nevada and Florida: These states have no state income tax anyway, so the fight there is purely about the federal side.
- California: They’ve taken a different route, focusing on "junk fees" and ensuring tips aren't used to subsidize base wages, though they still tax the income.
If you live in a state with high income tax, like New York or Massachusetts, you’re still paying the state’s cut regardless of what happens with federal law, unless your local legislature passes a companion bill.
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The "Loophole" Fear
Tax experts like those at the Tax Foundation have raised a massive red flag: reclassification. If tips become tax-free, what stops a high-earning attorney or a consultant from asking their clients to pay a $10 "fee" and a $5,000 "tip"?
It sounds ridiculous, but that’s how tax law works. If you create a vacuum, money will flow into it. To prevent this, the most recent versions of the bills floating around Congress have strict definitions. They limit "tip-eligible" professions to the service and hospitality sectors. But then you have to ask: is a barber a service worker? Is a gig-economy delivery driver? What about a nurse? The list of people who want "tip" status is growing, and that’s slowing down the legislative process.
The 2026 Reality Check
So, where are we right now?
We are in a period of "administrative waiting." Most tax professionals are advising their clients to continue reporting all tips as usual. If you stop reporting now, thinking the law has already changed, you are setting yourself up for a very painful audit. The IRS still considers tips as taxable income until the moment a new law is signed and the effective date passes.
Did they pass the no tax on tips in a way that affects your 2025 or 2026 filings?
Generally, no. You still need to track your cash and credit tips. You still need to report them to your employer. Your employer is still required to withhold taxes.
However, there is a silver lining. The massive public pressure has forced the Treasury Department to reconsider the "allocation" rules. This means it’s becoming harder for the IRS to "estimate" what you made and tax you on money you never actually took home.
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Actionable Steps for Tipped Employees
Don't wait for Congress to get their act together. You need to protect your finances now while the rules are in flux.
1. Maintain a Contemporaneous Log
The IRS loves paper trails. Use a simple notebook or a dedicated app like TipSee or JustTheTips. Record your gross tips, your "tip outs" to busboys or bartenders, and your net take-home every single shift. If a "no tax" law does pass retroactively, you'll need this data to claim your refund.
2. Watch Your Pay Stubs
Check how your employer is reporting your tips. Some POS systems (like Toast or Square) automatically report credit card tips, but they might be "estimating" your cash tips at a flat 8% or 10%. If you're making less than that in cash, you’re overpaying on taxes for money you don't have.
3. Understand the "Social Security" Trade-off
If a law passes that removes payroll taxes from tips, remember that your future Social Security check is calculated based on your reported earnings. If you report $0 in tips for ten years, your retirement check will be significantly smaller. It’s a "now" gain for a "later" loss.
4. Check Your State's Department of Revenue
Follow the local news in your state capital. Often, state-level changes happen with much less fanfare than federal ones but can put money in your pocket faster.
The dream of a tax-free tip jar isn't dead, but it is currently stuck in the messy, grinding gears of American bureaucracy. Keep your receipts, keep your records, and keep your eyes on the Federal Register. The "No Tax on Tips" era is coming, but it’s arriving in pieces, not all at once.
Next Steps for Tax Filing:
Check your most recent W-2 for "Social Security tips" and "Medicare tips" in Boxes 7 and 8. If these numbers look significantly higher than what you actually took home after tip-outs, consult a tax professional before the April filing deadline. You may be able to file Form 4137 to correct the discrepancy and potentially lower your tax liability while the new legislation continues to be debated.