HB7577, the Tipped Income Protection and Improvement Act of 2026, would change federal wage and tax rules for tipped workers. On the labor side, it amends the Fair Labor Standards Act so tipped employees must be paid the full federal minimum wage under section 6(a)(1), rather than a lower cash wage with a tip credit, while preserving the ability to pool tips among workers who customarily and regularly receive them. It also revises enforcement language so employers can be liable for unlawfully used or kept tips.
On the tax side, the bill would expand and make permanent the federal qualified tip deduction in the Internal Revenue Code. It increases the deduction limit for joint returns, adds anti-abuse rules to bar deductions for tips paid by related persons or where the worker has an ownership stake in the business, and requires a taxpayer identification number to claim the deduction. It also explicitly treats automatic gratuities as qualified tips for workers in hospitality, food and beverage service, and cosmetology, if they are paid under a uniform employer policy and meet the bill’s other requirements. The changes would apply to taxable years beginning after December 31, 2025.
Impact
The bill would significantly alter federal labor and tax treatment of tipped income. It would eliminate the federal tip credit for tipped employees by requiring full minimum wage payment under the Fair Labor Standards Act, while preserving tip pooling rules and strengthening remedies against employers who unlawfully retain tips. It would also amend the Internal Revenue Code to broaden eligibility for the tip deduction, make that deduction permanent, and extend it to certain automatic gratuities, affecting employers, tipped workers, and tax administration.
Sentiment
Based on the available context, the bill appears generally supportive of tipped workers and their take-home pay, with a policy emphasis on wage protection and tax relief. There are no recorded committee transcripts or votes in the provided materials, so no formal opposition or support is documented here. The bill’s framing suggests a pro-worker, pro-service-industry approach.
Contention
The main points of potential contention are likely to be the elimination of the tip credit, which could raise labor costs for employers in restaurants, hospitality, and other tipped industries, and the expansion of the tax deduction, which may raise concerns about revenue loss or complexity in administration. The bill also creates new eligibility limits and anti-abuse rules, including restrictions tied to related-party payments and ownership stakes, which may be debated as either necessary safeguards or burdensome compliance requirements. Automatic gratuities are another likely issue, since the bill would treat them as qualified tips only in specified occupations and under defined payment arrangements.
Small Business Flexibility ActThis bill provides statutory authority for the pooling of tips among two pools of employees. The first pool consists of employees who customarily and regularly receive tips (as is permitted under the current statute). The second pool consists of (1) employees who customarily and regularly receive tips and are paid at least minimum wage, and (2) employees who do not customarily and regularly receive tips.