The TIPS Act makes two major changes to how tipped workers are paid and taxed. First, it eliminates the separate minimum wage for tipped employees, meaning employers would have to pay tipped workers the full federal minimum wage instead of the current lower tipped minimum wage (which is $2.13 per hour). All tips would go directly to the worker, though workers could still voluntarily pool tips with coworkers if they wanted to.

Second, the bill creates a new tax deduction for people who receive tips. If you work in a job that traditionally involves tips—like restaurants, hotels, hair salons, parking attendance, or cleaning services—you can deduct the tips you received from your taxable income, but only if you earn less than $112,500 per year. This means tipped workers would pay less in federal income taxes. The changes would take effect starting in 2026.

In practical terms, this would help tipped workers in two ways: they'd get a guaranteed higher base wage from their employer, and they'd pay less in taxes on the tips they earn. However, some worry that if employers have to pay higher base wages, they might reduce the number of tipped positions or cut hours. The bill also clarifies that employers can't take credit for tips or keep tips that workers earned—all tips belong to the worker.