H.R. 7577: Tipped Income Protection and Improvement Act of 2026

This bill, known as the Tipped Income Protection and Improvement Act of 2026, proposes changes to the Fair Labor Standards Act (FLSA) concerning the minimum wage for tipped employees and amends the Internal Revenue Code related to tax deductions for tips. Below is a summary of the key provisions of the bill:

Minimum Wage for Tipped Employees

The bill amends the FLSA to establish the following:

• The minimum wage for tipped employees will be set at the same wage rate defined in another section of the FLSA.
• All tips received by a tipped employee must be kept by the employee, although tip pooling (sharing tips among staff) is allowed.

Penalties for Employers

The bill modifies the penalties for employers who improperly manage tips:

• It clarifies that penalties will focus on tips unlawfully used or kept by employers rather than just the tip credit taken.

Qualified Tip Deduction Changes

The bill also includes significant changes regarding tax deductions related to tips:

• The limit for the qualified tip deduction for joint tax returns will be increased from $25,000 to $50,000.
• It aims to prevent fraud and abuse by stipulating that deductions will only be allowed when specific conditions are met, including the taxpayer identification number requirement.

Treatment of Automatic Gratuities

For certain professions, the bill provides that:

• Automatic gratuities (e.g., mandatory service charges) will be considered qualified tips, which means they can be included in the calculations for deductions.

Deduction Permanence

The bill makes the qualified tip deduction a permanent feature of the tax code and repeals any sunset provisions that would have affected its status.

Effective Date

The changes proposed by the bill would take effect for tax years beginning after December 31, 2025.

Relevant Companies

None found.