Tax-Free Tips Coming Soon?! What It Means for Iowa, Illinois, and Wisconsin

Big news for servers, bartenders, delivery drivers, and salon workers across the Midwest. According to the Washington Post, the U.S. Senate unanimously passed the No Tax on Tips Act, a bipartisan bill that could put more money directly into the pockets of tipped workers. The bill now heads to the House, where its future is still being debated.

What’s in the Bill?

The No Tax on Tips Act (S.129) allows workers in traditionally tipped jobs to deduct up to $25,000 per year in reported tips from their federal income taxes. To qualify, workers must earn under $160,000 annually, and the tips must be reported to employers for payroll tax purposes. The bill also expands employer tax credits for payroll taxes paid on tips in beauty and personal care services.

Importantly, the bill defines “cash tips” broadly. It covers not just physical cash, but also tips paid with credit or debit cards and checks. The Treasury Department is expected to publish a list of eligible occupations within 90 days of the bill’s enactment.

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Local Impact in Iowa, Illinois, and Wisconsin

While the federal bill is still pending in the House, all three Midwestern states are already exploring their own versions of this "tip tax relief"

Iowa: Both Republican and Democratic lawmakers have introduced bills to eliminate state income taxes on tips. House File 268, led by Rep. Bobby Kaufmann (R-Wilton), passed the House Ways and Means Committee unanimously. Democrats introduced a similar bill, House File 293, signaling rare bipartisan support.

Illinois: State Senator Craig Wilcox (R-McHenry) filed Senate Bill 140, which would exempt tips from Illinois’ 4.95% state income tax. The bill aims to boost take-home pay for service workers and attract more people to the industry amid ongoing labor shortages.

Wisconsin: The Wisconsin Restaurant Association has endorsed the idea, and Governor Tony Evers expressed support during his recent budget address. Industry leaders believe the change could help fill thousands of open service jobs across the state.

What to Watch For in Tips and Taxes

While the bill has broad political appeal, some economists and policy experts are raising red flags. Critics argue that many tipped workers already pay little to no federal income tax, so the benefit may be limited. There’s also concern that employers might shift more compensation into tips to reduce their tax liabilities. That could potentially undermine workers’ eligibility for programs like the Earned Income Tax Credit or Social Security benefits.

Additionally, the bill is currently bundled into a larger and more controversial House package known as the “One Big Beautiful Bill Act,” which includes sweeping tax reforms and spending cuts. Some lawmakers are pushing to separate the tip provision to ensure it passes on its own merits, as many Democrats and even some Republicans have begun to balk at sections of the bill, despite the fact that it just passed in the House.

If the No Tax on Tips Act becomes law, it could mean a meaningful boost in take-home pay for thousands of Tri-State workers in restaurants, salons, and delivery services. Either way, political wrangling is still underway in the House, so it’s not a done deal yet. As of now, tipped workers in Iowa, Illinois, and Wisconsin should keep an eye on both federal and state developments. It may be time to start tracking those tips a little more closely.