After being passed by the House of Representatives, this year’s reconciliation bill (H.R. 1) moved to the Senate, which passed its own version of the legislation today, July 1.  The Senate bill would preserve without significant change many tax-related items from the House bill.  There are several provisions, however, where the Senate bill varies from the version the passed the House earlier.  The Senate-passed legislation will now head back to the House, where its fate is somewhat uncertain.

We previously covered several of the relevant tax provisions when House passed its version of the reconciliation bill.  This article is part of a series of articles examining how those provisions would change under the Senate’s legislation.

The Senate-passed bill contains a new edition of the No Tax On Tips provision, adopting aspects of the provision included in both the House reconciliation bill passed by the House of Representatives (the “House Bill”) (see prior coverage) and in the previous standalone Senate bill on No Tax On Tips (“S. 129”) (see prior coverage).

Qualified Tips.  Like earlier versions of the proposal, the Senate Bill provides a below-the-line deduction for both itemizers and non-itemizers for “cash tips” (which includes tips received from customers that are paid in cash or charged and tips received from other employees under tip-sharing arrangements) received by individuals in an occupation which customarily and regularly received tips on or before December 31, 2024 (“qualified tips”).

The Senate Bill defines qualified tips similar to the definition in the House Bill, providing that: (1) such amounts must be paid voluntarily without any consequence in the event of non-payment, cannot be the subject of negotiation, and must be determined by the payor. The Senate Bill also imposes additional limitations on which tips are deductible, similar to the limitations in the House Bill: (1) the trade or business in the course of which the individual receives such tips is not a specific service trade or business as defined in section 199A(d)(2); and (2) other requirements established by the Department of Treasury are satisfied.

Notably, the Senate Bill omits the requirement contained in S. 129 that the tip be received in the course of the recipient’s employment.  As a result, as in the House Bill, self-employed individuals and independent contractors may be eligible for the deduction.

To be deductible, the tips must be included on Forms W-2, 1099-K (Payment Card and Third Party Network Transactions), 1099-NEC (Nonemployee Compensation), or 4317 (Social Security and Medicare Tax on Unreported Tip Income) (as applicable).

The Senate Bill provides that qualified tips received by an individual in the course of a trade or business (other than the trade or business of performing services as an employee) may only be deducted to the extent the gross receipts of the taxpayer from the trade or business (including any qualified tips) in which the tips are received for such taxable year exceeds the sum of the deductions (other than the deduction for qualified tips) allocable to such trade or business for such taxable year.  Unlike the House Bill, no reference is made to the cost of goods sold allocable to such receipts.

Maximum Deduction.  As with S. 129 (and unlike the House Bill), the Senate Bill imposes a maximum deductible amount of $25,000.  However, the Senate Bill adds that the deduction begins to phase out when the taxpayer’s modified adjusted gross income exceeds $150,000 (or $300,000 in the case of a joint return).

Social Security Number Required.  The Senate Bill reinstates the House Bill’s requirement that the taxpayer claiming the deduction must provide its social security number on its tax return; this requirement was not included in S. 129.  Additionally, if the taxpayer is married, the return must also include the taxpayer’s spouse’s social security number.

Reporting Requirements.  While the Senate Bill largely adopts the reporting requirements contained in the House Bill, the Senate Bill adds a transition rule for taxable years beginning before January 1, 2026, allowing approximation of a separate accounting of amounts designated as tips by “any reasonable method” specified by the Treasury.

Applicability Period and Termination.  The deduction is available for tax years beginning after December 31, 2024.  While S. 129 did not contain a sunset provision, the Senate Bill reinstates the termination date specified in the House Bill of December 31, 2028.

FICA Tip Credit. In a change from earlier versions of the Senate Bill, the final Senate Bill includes an extension of the section 45B credit to the beauty service industry, including barbering and hair care, nail care, esthetics, and body and spa treatments.