While on the presidential campaign trail last year, Donald Trump promised workers in Las Vegas that he would eliminate taxes on tips. It was a popular proposal — so popular, in fact, that his competitor Kamala Harris embraced the idea as well.
On Monday, Republicans in the House unveiled plans for a tax bill that would make tips tax free. As currently written, the bill would create a tax deduction for tips through 2028.
“I’m in favor of deliberate tax writing instead of fast tax writing,” says Michael Greenwald, director of tax services for accounting firm Berkowitz Pollack Brant in Miami. He hopes that whatever Congress approves will be well-crafted legislation that is clearly written and easily understood by taxpayers and tax professionals.
However, speed seems to be on the mind of legislative leaders who say they plan to have a tax-cutting budget bill through the House by Memorial Day and the Senate by July 4. Before they can do that, though, they need to work out the details of exactly if and how Trump’s tax promises will be implemented.
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Campaign Promise to Eliminate Taxes on Tips
On his campaign website, Trump lists “20 core promises,” including “no tax on tips.” How that promise will be delivered is not spelled out.
“He said we’re going to eliminate taxes on tips without a lot of details,” says Philip Sprunger, associate professor of economics at Lycoming College in Williamsport, Pennsylvania.
But it may not matter since Congress, not the president, enacts changes to the tax code. “Ultimately, he doesn’t have the power to do this,” according to Sprunger.
“I think it was a political play to get elected,” says Steve Azoury, owner of Azoury Financial in Troy, Michigan. He adds that he doesn’t think exempting tips from taxes is a bad idea, but he thinks the proposal was more a means to win votes than an attempt to put forth a fully fleshed-out tax plan.
Why Target Tipped Wages
While it appears politically popular to exempt tipped income from taxes, the proposal will only affect a small percentage of workers. “Only 2.5% of the U.S. workforce is employed in jobs that traditionally receive tipped wages,” according to Denis Poljak, partner and wealth manager at Poljak Group Wealth Management at Steward Partners in Shreveport, Louisiana.
Still, even for those who don’t earn tips, exempting tips from taxes may feel like the right thing to do.
“I think it comes from a sense of that when you give someone a tip, it’s given as a voluntary gift,” Sprunger says. Tips are often viewed as a bonus that recognizes someone going above and beyond expectations, he adds, so “it feels different” to tax them.
Tipped workers also earn a lower federal minimum wage, reinforcing the perception that taxing tips unfairly penalizes low-income employees.
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How Much Tipped Workers Earn
“While we tend to think of people getting tipped income at the lower income scale, that’s not always true,” Greenwald says.
The federal minimum wage for tipped workers is $2.13 per hour. If a worker does not earn enough tips to meet or exceed the regular $7.25 per hour minimum wage, their employer must make up the difference.
Tipped workers may make more, though. For instance, data collected by the Bureau of Labor Statistics found that servers had average hourly wages of $17.56 in 2023. Meanwhile, ADP Research found that median pay for full-service restaurant workers in 2024 was $23.88 per hour, including tips and base pay.
Exempting only tips from taxes could create some tension among workers, particularly in environments where some workers earn primarily tips and others earn primarily wages. Plus, the tip exemption excludes other low-income jobs that some may also feel are due a tax break.
Change Could Reduce Social Security Benefits, Shift Payment Models
The impact of exempting tips from taxes is hard to gauge. “The devil is in the details,” according to Greenwald, and few details are available.
Trump’s promise of “no tax on tips” implies that workers will be able to avoid both income tax and payroll taxes, which fund the Medicare and Social Security systems. However, a person’s Social Security benefits are directly tied to their earnings. If earnings aren’t taxable, they may not be used in the benefits calculation and could reduce a worker’s future Social Security payments.
If tips aren’t taxed, that could also change the way people are paid. “People might try to convert income into tips,” Greenwald says.
Or it could be businesses that initiate changes. “If tips become tax-exempt, there could be more businesses that move to a (payment) model that relies on tips,” Sprunger says.
The unintended consequence of that might be what some describe as “tip fatigue.” When consumers are prompted to provide more tips, they may be inclined to tip less.
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Most Likely to Pass as Part of a Budget Bill
In January, a bipartisan group of legislators introduced the No Tax on Tips Act in the House and Senate. It includes the following provisions:
— 100% federal income tax deduction on up to $25,000 in tips each year
— Limits the deduction to traditionally tipped workers such as servers, beauticians and hospitality workers
— Excludes highly compensated employees
However, many believe that if the tip exclusion passes, it will likely be included in a broader budget reconciliation bill — allowing it to move forward with a simple majority. Work on a reconciliation bill is currently underway, with its main goal being an extension of 2017 tax cuts that are set to expire at the end of this year.
As unveiled by the House, the tax bill would exempt tips from income tax but only if they are received by an individual in an “occupation which traditionally and customarily received tips” prior to Dec. 31, 2024. The Secretary of the Treasury is required to submit a list of those occupations within 90 days of the bill going into effect.
“The major issue with all these proposals is: How are you going to offset the loss of revenue,” Poljak says. Estimates are that eliminating taxes on tips will cost $150 billion to $200 billion over 10 years. While that sounds like a lot, “The revenue implications of this are not that big compared to other parts of the tax cut bill,” according to Poljak.
Details of the budget bill are still being negotiated. But to pay for expected tax cuts, lawmakers may need to identify as much as $2 trillion in spending reductions.
“The president has made a lot of promises, and I know Congress is working hard to include most or all of those promises,” Sprunger says. “I think, at some level, it will probably go through.”
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Trump Proposed Eliminating Taxes on Tipped Workers. Here’s What Employees Should Know originally appeared on usnews.com
