To amend the Internal Revenue Code of 1986 to provide that tips shall not be subject to income or employment taxes.

Summary: Tax Free Tips Act of 2007 - Amends the Internal Revenue Code to exempt tips from the income tax, social security and railroad retirement taxes, unemployment taxes, and tax withholding. Defines "tips" as any gratuity provided to a salaried employee by a customer or client of the employer's business.

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``Tax Free Tips Act 
of 2007''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of , a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. TIPS NOT SUBJECT TO INCOME OR EMPLOYMENT TAXES.

    (a) In General.--Section 102 (relating to gifts and inheritances) 
is amended by adding at the end the following new subsection:
    ``(d) Tips.--For purposes of subsection (a), tips shall be treated 
as property transferred by gift.''.
    (b) Exclusion From Social Security Taxes.--
            (1) Social security taxes.--
                    (A) Paragraph (12) of section 3121(a) is amended to 
                read as follows:
            ``(12) tips;''.
                    (B) Section 3121 is amended by striking subsection 
                (q) (relating to tips included for both employee and 
                employer taxes).
                    (C) Subsection (a) of section 3102 is amended by 
                striking ``; and an employer who is furnished by an 
                employee a written statement of tips (received in a 
                calendar month) pursuant to section 6053(a) to which 
                paragraph (12)(B) of section 3121(a) is applicable may 
                deduct an amount equivalent to such tax with respect to 
                such tips from any wages of the employee (exclusive of 
                tips) under his control, even though at the time such 
                statement is furnished the total amount of the tips 
                included in statements furnished to the employer as 
                having been received by the employee in such calendar 
                month in the course of his employment by such employer 
                is less than $20''.
                    (D) Section 3102 is amended by striking subsection 
                (c) (relating to special rule for tips).
                    (E) Subsection (a) of section 3202 is amended by 
                striking the second sentence.
            (2) Tier 1 railroad retirement.--
                    (A) Section 3202 is amended by striking subsection 
                (c).
                    (B) Paragraph (3) of section 3231(e) is amended to 
                read as follows:
            ``(3) Solely for purposes of the taxes imposed by section 
        3201 and other provisions of this chapter insofar as they 
        relate to such taxes, the term `compensation' shall not include 
        tips.''.
                    (C) Section 3231 is amended by striking subsection 
                (h).
    (c) Exclusion From Unemployment Compensation Taxes.--Subsection (s) 
of section 3306 is amended to read as follows:
    ``(s) Tips Not Treated as Wages.--For purposes of this chapter, the 
term `wages' shall not include tips.''.
    (d) Exclusion From Wage Withholding.--
            (1) Paragraph (16) of section 3401(a) is amended to read as 
        follows:
            ``(16) tips;''.
            (2) Section 3401 is amended by striking subsection (f).
            (3) Section 3402 is amended by striking subsection (k).
    (e) Tips Defined.--Subsection (a) of section 7701 (relating to 
definitions) is amended by adding at the end the following new 
paragraph:
            ``(50) Tips.--The term `tips' includes any gratuity 
        provided to a salaried employee by a customer or client of the 
        employer's business.''.
    (f) Conforming Amendments.--
            (1) Clause (i) of section 32(c)(2)(A) (defining earned 
        income) is amended by striking ``tips,''.
            (2)(A) Section 45B (relating to credit for portion of 
        employer social security taxes paid with respect to employee 
        cash tips) is hereby repealed.
            (B) The table of sections for subpart D of part IV of 
        subchapter A of chapter 1 is amended by striking the item 
        relating to section 45B.
            (C) Subsection (b) of section 38 is amended by striking 
        paragraph (11) and by redesignating the succeeding paragraphs 
        accordingly.
            (D) Subsection (c) of section 196 is amended by striking 
        paragraph (8) and by redesignating the succeeding paragraphs 
        accordingly.
            (E) Subsection (m) of section 6501 is amended by striking 
        ``45B,''.
            (3) Section 220(b)(4)(A) is amended by striking ``tips,''.
            (4) Section 451 is amended by striking subsection (c).
            (5) Section 6001 is amended by striking the last sentence.
            (6) Section 6041 is amended by striking subsection (e).
            (7) Subsection (c) of section 6041A is amended by striking 
        ``, 6052, or 6053'' and inserting ``or 6052''.
            (8) Subsection (a) of section 6051 is amended by striking 
        ``In the case of tips received by an employee in the course of 
        his employment, the amounts required to be shown by paragraphs 
        (3) and (5) shall include only such tips as are included in 
        statements furnished to the employer pursuant to section 
        6053(a).''.
            (9) Section 6053 (relating to tip reporting) is hereby 
        repealed.
            (10) The table of sections for subpart C of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6053.
            (11) Section 6652 is amended by striking subsection (b) 
        (relating to failure to report tips).
            (12) Section 6674 (relating to fraudulent statement or 
        failure to furnish statement to employee) is amended by 
        striking ``or 6053(b)'' each place it appears.
            (13) Subparagraph (B) of section 6724(d)(1) is amended by 
        striking clause (xv) and redesignating the succeeding clauses 
        accordingly.
            (14) Paragraph (2) of section 6724(d) is amended by 
        striking subparagraph (V) and redesignating the succeeding 
        subparagraphs accordingly.
    (g) Effective Date.--The amendments made by this section shall 
apply to tips received in calendar months beginning after the date of 
the enactment of this Act.