Trump’s Tax Cut on Tips: A Boon for Workers or a Risky Gamble?
LOUISVILLE, Ky. – Picture this: it’s a bustling morning at the local Waffle House, where Mike Broughton, a dedicated server and cook, springs into action as soon as the manager arrives with a fresh batch of orders.
“Four to six eggs, scrambled. Wheat toast, dry, with strawberry jelly. Hash browns, smothered and peppered,” he quickly notes, having learned the favorite requests from his loyal patrons.
“It’s such a delight,” Mike shares with a grin. “These regulars? They come in, and I know exactly what they want. It just makes the job more enjoyable!”
This camaraderie not only enhances the dining experience but can also lead to increased tips—an essential boost for employees like Mike who rely on gratuities to boost their income.
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And now, exciting changes may be on the horizon for workers like Mike, as discussions heat up around a new tax proposal that could redefine tipping as we know it.
This summer, a bold idea emerged: eliminating taxes on tips earned by everyone from servers to hairdressers. This proposal was highlighted by President Trump during a rally in Las Vegas, one of the cities with a thriving service industry.
Vice President Kamala Harris quickly joined the conversation, endorsing the initiative while several lawmakers moved to transform this campaign pledge into a tangible legislative reality.
“If this actually happens, it would be a game changer,” Mike expressed. “But I’ve learned to take promises from politicians with a pinch of salt.”
While the idea of supporting low-wage workers resonated across political lines, experts are raising eyebrows about its effectiveness and potential consequences.
“If the goal is to uplift low-income workers, this isn’t the best route to take,” cautioned William Gale, an economist with the Brookings Institution. “It’s not an effective way to assist those who truly need help.”
Proposed plan to support tip earners faces scrutiny
Only about 2.5% of the American workforce, approximately 4 million individuals, typically earn tips according to estimates from analysts. For these workers, tips count as taxable income.
However, many who rely on tips for their livelihoods may not see much benefit from this proposal, as around 37% of them already earn too little to pay federal income taxes.
The federal income tax system is designed to be progressive, meaning higher earners pay more. Consequently, those who would benefit most from this proposal are often those with higher incomes.
Workers earning below the standard deduction threshold (which will be $14,600 for singles and $29,200 for married couples in 2024) won’t owe federal income taxes.
Others may find their tax bills lessened or eliminated due to tax credits designed for lower-wage earners, such as the earned income tax credit and the child tax credit.
Under this proposed plan, while workers would still pay federal income tax on their hourly wages, they would not face taxes on tips—regardless of whether they’re received in cash, card, or check.
Estimates suggest that families impacted by this change could see an average tax cut of around $1,700, with those in the lowest income bracket receiving approximately $200 in tax relief.
For Dee Thornton, a server at Toasty’s in Louisville, this proposal could mark a significant shift in her financial landscape. “I believe tips represent gratitude,” the 28-year-old stated. “It just seems unfair to tax money that isn’t stable.”
Emily Litzinger, a partner at a national employment law firm, acknowledges that while the policy could benefit both employees and employers, its overall impact may be limited and its effects on workplace dynamics remain unclear.
“The goal is to enable low-wage earners in service roles to take home more, which could help alleviate the financial pressures on restaurants struggling with rising costs,” she noted.
What about payroll taxes?
For Ryan Hughes-Svab, co-owner of The Misfit Lou restaurant in downtown Louisville, opinions on the proposal are mixed, and many questions arise regarding its implementation.
Would it only eliminate federal income tax? Would it apply to specific industries? Would there be income limitations?
For many workers, tips can form a substantial part of their earnings, especially when base wages hover near the federal minimum of $7.25 per hour.
Employers have the option to pay tipped employees as little as $2.13 per hour, leveraging the tip credit system, which assumes tips will make up the difference. If they don’t, employers are required to pay the shortfall.
“I see potential benefits for many people,” Hughes-Svab remarked about the proposal. “However, it’s essential to consider potential downsides, like the risk of encouraging an overtipping culture or larger companies trying to capitalize on this by reducing their labor expenses.”
Should the tax code change, both Hughes-Svab and his partner emphasize the importance of employees accurately reporting their tips as income—something that has proven crucial when applying for loans.
Experts from the American Enterprise Institute caution that not counting tips as income could inadvertently reduce a worker’s access to tax credits, like the earned income tax credit, which relies on reported income levels.
Hughes-Svab and Svab also stress the need for employees to continue contributing to Social Security and Medicare, ensuring their future benefits remain intact.
Several bills have been introduced in Congress, each sharing similarities yet differing in their approach to payroll taxes, including FICA, which supports Medicare and Social Security.
For instance, legislation proposed by Senator Ted Cruz mandates that while workers would still owe payroll taxes, their tips would be exempt from income tax through a deduction. Meanwhile, a proposal from Representative Thomas Massie would further exempt tips from payroll taxes altogether.
The National Restaurant Association backs the idea of eliminating income tax on tips while advocating for the continuation of payroll taxes, emphasizing the necessity for employees to demonstrate income for credit-building and contributions to Social Security and unemployment benefits.
Examining the fairness of the proposal
Granting a tax break to one segment of the workforce raises fairness concerns, according to William Gale of the Brookings Institution, as the proposal creates a special treatment for a small group of workers.
Consider this scenario: a grocery store employee earning $30,000 per year and a restaurant server making $10,000 in wages plus $20,000 in tips—despite earning identical amounts, the grocery worker faces a higher tax burden.
“This is the core issue: similar earners should be treated equitably,” Gale points out. “Others receiving different forms of income will surely question, ‘Why not us?’”
According to the U.S. Bureau of Labor Statistics, the median earnings for waitstaff in the U.S. hover around $32,000 annually, or about $15.36 per hour.
Research indicates that only about 5% to 6% of the lowest income workers would benefit from the tipping proposal, according to the Yale Budget Lab.
“While it may help some, those benefiting are primarily higher earners who receive tips,” Gale observes. “If the intent is to support low-income workers, why focus on a form of compensation that only a fraction of them receive?”
Employers are also wary of potential disruptions in workplaces where tipped and non-tipped employees co-exist, especially in restaurants where servers earn tips while kitchen staff do not, Litzinger indicated.
“There’s a palpable concern about employee morale,” Litzinger notes, who also serves on the board of the Kentucky Restaurant Association. “If only front-of-house staff benefit from tax-free tips, that could create tension with back-of-house employees.”
Concerns about unintended consequences and potential abuses
While this proposal aims to put more money in the pockets of service workers, experts caution about possible negative effects.
One major worry is that employers might begin adopting tipping practices in positions where it isn’t currently used, simply to exploit the tax-free nature of tips and shift labor costs to customers.
Additionally, the proliferation of tipping screens in various establishments could lead to “tip fatigue” among consumers, which may adversely affect tip amounts for employees.
Another important question is how tipping culture may evolve if more employers shift to this system. A 2023 survey from the Pew Research Center revealed a growing expectation surrounding tipping, with many Americans noticing it expanding into more venues than ever before.
“Post-pandemic, we’ve witnessed a notable uptick in tipping, but will this lead to consumer backlash? What will the long-term effects be?” Litzinger pondered. “And how will consumers react to this evolving landscape?”
Gale raises concerns that high-income earners in non-tipped professions could manipulate the system by reclassifying their earnings as tipped income.
“Could non-tipped workers start advocating for a tipping system?” Litzinger asked. “It’s hard to predict how far this could escalate.”
Some economists argue that instead of focusing on tax exemptions, we should be addressing broader measures to aid low-wage workers, such as increasing tax credits and raising the minimum wage.
On the flip side, tax-free tips could enhance the appeal of tip-based positions, broadening the labor pool for such jobs and simplifying hiring and retention for employers, Litzinger pointed out.
This proposal may also attract employers looking to reduce labor costs, especially as margins tighten due to rising expenses.
“I believe this could alleviate some of the financial pressures operators face,” she concluded. “Many are navigating extremely tight profit margins.”
As for the broader financial impact, eliminating both income and payroll taxes on tips could cost the federal government between $150 billion and $250 billion over the next decade, according to experts.
Another estimate suggests that only eliminating income taxes could result in a loss of about $107 billion over the same period.
Current status of the proposal
Despite its introduction over the summer, legislative progress has stalled in Congress.
Tax experts predict that if this proposal gains traction, it will likely coincide with broader tax policy discussions next year, especially concerning the expiration of the 2017 Tax Cuts and Jobs Act and other Trump-era tax initiatives.
“This issue will likely be part of a larger tax debate, and its fate will depend on many interconnected factors,” Gale noted.
For now, Mike Broughton will continue to serve up breakfast at the Waffle House, keeping his customers’ coffee cups filled and their mornings bright.
Contact Matthew Glowicki at [email protected].
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