H.R. 7577 — TIP Improvement Act of 2026

This section eliminates the tip credit under the Fair Labor Standards Act (FLSA), requiring employers to pay tipped employees the full minimum wage in section 6(a)(1) ($7.25 per hour) with all tips retained by the employee (pooling permitted among tipped employees). (As background, the FLSA previously allowed employers to pay a cash wage of at least $2.13 per hour to tipped employees and credit tips toward the difference up to the $7.25 per hour minimum wage.) It further revises civil and criminal penalties in FLSA section 16 to base liability on the sum of all tips unlawfully used or kept by the employer (previously, the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer).

This section makes permanent the above-the-line deduction for qualified tips (i.e., cash tips received by certain service workers) and expands it, for taxable years beginning after December 31, 2025, by (1) increasing the annual deduction limit to $50,000 (from $25,000) for joint returns; (2) requiring that qualifying tips be paid by persons unrelated to the recipient under IRC §267(b) and that the recipient have no ownership stake in the employer; (3) denying the deduction without the individual's taxpayer identification number (or one spouse's, for joint returns) on the tax return; and (4) treating automatic gratuities as qualified tips for workers in hospitality, food and beverage service, or cosmetology (i.e., mandatory or suggested amounts under a uniform employer policy, received by the worker or pooled solely among employees).