New TIP Improvement Act Could Reshape Pay, Taxes for Restaurant Workers

The federal tipped minimum wage has been $2.13 an hour since 1991. Rep. Steven Horsford, a Democrat representing Nevada's 4th congressional district, introduced H.R. 7577 on February 13 to eliminate it, standing alongside Culinary Union Local 226 members and tipped workers from across Southern Nevada to announce the Tipped Income Protection and Improvement Act.

The $2.13 floor, set when Congress amended the Fair Labor Standards Act more than three decades ago, allows employers to pay servers, bartenders, and other tipped staff well below the $7.25 federal minimum wage, with customer gratuities expected to close the gap. Employers are legally required to make up any shortfall, but the baseline itself has never moved. Horsford's bill would eliminate the subminimum wage entirely, requiring employers to start at the full federal minimum wage before any tip income factors in.

The legislation pairs that wage change with several targeted amendments to the tax code. Under a "No Tax on Tips" deduction already on the books, workers can deduct up to $25,000 in qualified tip income annually, but that provision expires in 2028 and excludes automatic gratuities. Service charges added to large-party bills are currently classified as wages rather than tips for tax purposes, putting them outside the deduction's reach. H.R. 7577 would reclassify automatic gratuities as qualified tips when fully passed through to employees or distributed through a tip pool, a change with direct consequences for restaurants where service charges on large parties are standard practice.

The bill also addresses what Horsford's office described as a marriage penalty in the existing deduction structure. The $25,000 cap currently applies regardless of filing status, which effectively penalizes households where both partners work in tipped positions. The TIP Improvement Act would raise that ceiling to $50,000 for joint filers and make the deduction permanent, removing the 2028 sunset. Workers would also be able to claim the deduction using a verified Tax Identification Number. Social Security and Medicare payroll taxes would still apply to tip income, distinguishing H.R. 7577 from broader income-tax elimination proposals backed by some Republican lawmakers.

After introduction, the bill was referred to the House Committee on Ways and Means and the Committee on Education and Workforce. As of early April, no markup date had been scheduled.

The practical stakes differ depending on where a restaurant operates. Nevada, California, and Washington have already abolished the subminimum tipped wage at the state level; for employers there, federal alignment would mostly confirm what state law already requires. In states that still allow tip credits, however, passage would require rebuilding payroll systems, revising withholding calculations, and updating tip pooling policies to reflect a new federal baseline, with particular complexity for multi-state operators.

Ted Pappageorge, Secretary-Treasurer of Culinary Union Local 226, backed the legislation publicly. The union framed the TIP Improvement Act as a bill built from worker input rather than industry lobbying, drawing a clear distinction from narrower proposals focused solely on tax relief without addressing the underlying wage structure.

The bill faces an uncertain path in a divided Congress, where wage and tax proposals for service workers have stalled across multiple sessions. What has changed is the political salience of the issue: "No Tax on Tips" became a bipartisan talking point in 2024 and 2025, and Horsford's bill is structured to use that momentum while tying the tax benefit to a wage floor that has not been revisited in more than 30 years.