TIP Improvement Act of 2026

This legislation significantly amends the Fair Labor Standards Act of 1938 to require employers to pay tipped employees the full federal minimum wage, thereby eliminating the current tip credit system. It mandates that all tips received by an employee must be retained by them, though it still permits tip pooling among employees who customarily receive tips. The bill also strengthens penalties for employers who unlawfully use or keep employee tips, ensuring greater protection for workers' earnings. Concurrently, the bill modifies the Internal Revenue Code of 1986 by making the existing qualified tip deduction permanent and increasing the deduction limit for individuals filing joint tax returns. To prevent fraud and abuse, it specifies that tips from related parties or to employees with an ownership stake in the business are not deductible. Furthermore, for workers in hospitality, food and beverage service, or cosmetology, automatic gratuities can now be considered qualified tips under certain conditions, such as being a mandatory or suggested amount fully received by the employee or pooled among employees.