Eliminating taxes on tips has emerged as a sturdy — and contentious — political talking point in the last year, and now it’s a step closer to reality. On Tuesday, the Senate unanimously voted to pass the No Tax on Tips Act, a bill that largely does what it says on the tin. It now heads to the House, where similar legislation has been under consideration as part of the embattled super-bill of tax cuts and the federal budget.

Tipping accounts for a major portion of many people’s incomes, whether they work in service, hospitality or elsewhere, and like most other forms of income, you have to report it to the IRS come tax season. A 2023 survey from the Pew Research Center found around 43% of Americans had experience working at a job where they received tips in addition to standard hourly wages, especially younger respondents, those from lower-income homes and women.

At this point, removing some of the taxes on tipped income seems like one of the most likely proposals to make it through the legislative chaos in Congress right now. While it might seem like an easy win no matter your political leanings, there are still plenty of reasons to be concerned about what the knock-on effects might be.

For everything you need to know about what this bill might mean for you — and how to handle your tipped income during tax time overall — keep reading. For more, check out our breakdown of what extending the Trump tax cuts might mean for you.

Are taxes on tips going away with this bill?

Doing away with federal taxes on tipped income emerged as a prominent political discussion over the past year, particularly after both major party 2024 presidential candidates, Kamala Harris and Donald Trump, supported the idea as a way to put more money back in the pockets of working-class people. Since taking office in January, Trump has repeated his pledge to eliminate taxes on tips.

The No Tax on Tips Act was set forth in Congress earlier with bipartisan support and has just passed one chamber of Congress with ease. As it stands, the bill would create a tax deduction for workers in traditionally tipped fields for up to $25,000 per year. It would, however, exclude tipped workers making over $160,000 and would require the Treasury to create a list of jobs the deduction would apply to within 90 days of the bill going into effect. That income level will also be reexamined annually to account for inflation.

It’s not all sunshine and unanimous bipartisan support. Writing in a blog post for the Tax Foundation, a nonprofit advocacy group, Senior Policy Analyst Alex Muresianu warned that doing away with tips on taxes could have unintended harms. It could encourage more industries, for instance, to move toward a gratuity-based payment system, reducing the amount of overall taxes collected. The subject also came up in a recent segment on HBO’s Last Week Tonight, in which host John Oliver echoed some of those concerns and suggested that, rather than a tax exemption for tipped income, workers in traditionally tip-driven industries should have their base pay increased instead.

Do I need to track my tips for my tax return?

Yes. You must report the income you made from tips on your tax return. On its website, the IRS advises you keep a “daily tip record” in order to have the full amount ready to report come tax season. You are also advised to let your employer know how much you’re making in tips. This allows them to have an accurate sense of your income level, so that they can withhold the correct amount from your standard paycheck.

Are tips taxed differently than normal income?

In general, no, tips are not taxed at a different rate than your standard wages. Your income tax rate would change only if your income from tips pushed you into a higher income bracket, which would change the rate applied to your overall income. If the amount of tips you received in a given month is less than $20, however, you don’t need to report that money as income on your taxes.

What if I fail to report my income from tips?

If you think you can keep your tip income under the table, think again. If the IRS catches you withholding tips from your tax return, you’ll be hit with a penalty that requires you to pay “equal to 50% of the Social Security, Medicare, Additional Medicare, or railroad retirement taxes you owe on the unreported tips” on top of the amount you’ll owe in general, per the IRS website. The agency has a variety of methods used to catch “underreporters” who fail to report all of their income, such as monitoring your bank statements or e-commerce activity. Better safe than sorry. For more, find out everything you should know about IRS audits.