The Trump administration’s proposal to exempt tips from income tax for servers, known as the “No Tax on Tips Act,” is more complex than it may initially appear. This proposal, endorsed by both President Donald Trump and former Vice President Kamala Harris, aims to provide a tax break for tipped workers on gratuities up to $25,000 from federal income tax. The bill is currently being incorporated into a larger bill being negotiated by Congress.
Under the proposed act, only cash tips reported to employers for payroll tax purposes would qualify for the deduction. Workers earning over $160,000 annually would not be eligible, and the deduction would not apply to payroll or state income taxes unless states choose to follow suit. The bill also includes an expansion of the business tax credit for employers, allowing them to claim credit on payroll taxes for tips received in beauty services establishments, in addition to food and beverage establishments.
While supporters view this proposal as a financial relief for servers who rely on tips, critics argue that it may not benefit many workers. Data from the Brookings Institution indicates that a significant portion of tipped workers do not earn enough to pay federal income tax and could potentially lose eligibility for important tax credits. Additionally, the policy could be used by employers as a means to avoid raising base wages, particularly in industries still utilizing the federal tipped minimum wage.
Beyond its impact on workers and employers, the No Tax on Tips Act could also influence tipping culture and customer behavior. The act may lead to changes in tipping norms, with more industries adopting practices that prompt customers to tip voluntarily. This shift could result in an increased expectation for tips in various service settings, potentially leading to “tip fatigue” among customers.
According to The Wall Street Journal, in 2024, 38% of consumers reported tipping restaurant servers 20% or more, based on data from restaurant technology company Popmenu. This is a decrease from 56% in 2021. Americans also dined out less in 2024 compared to 2023.
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This article was first published on GOBankingRates.com: How ‘No Tax on Tips’ May Impact You as Both a Server and a Customer
