The debate over tips in the United States is heating up. Data show people often feel pressured to tip, even at places they never used to. And with prices being as high as they are, some find it challenging to tip on top of everything else.
Then, there’s the question of whether businesses should pay higher minimum wages instead of having their employees rely on tips. Those issues make tipping a pain point for many.
But that's not all. During the presidential election campaign, the idea of eliminating federal taxes on tips gained traction on both sides of the political aisle.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
That rare alignment between the two major political parties revived debate over how to support service industry workers, many of whom struggle financially despite working long hours. Both sides at least seem to recognize the potential political benefits of a policy that could impact millions of people.
But the proposal remains controversial and has advantages and drawbacks that policymakers would have to deal with. So, will eliminating taxes on tips help workers or even come to fruition?
Here’s more of what you need to know.
Will Trump end taxes on tips?
President Donald Trump initially mentioned ending taxes on tips at a campaign rally late last year, some say to appeal to “working-class” voters.
“To those hotel workers and people who get tips, you are going to be very happy because when I get to office, we are going to not charge taxes on tips, people making tips,” Trump told supporters during the presidential campaign.
A few days before Trump resumed the presidency for his second term, Senators Ted Cruz (R-TX) and Rick Scott (R-FL) reintroduced the "No Tax on Tips Act," to address part of Trump's campaign promise.
The bill proposes exempting tips from federal income tax, allowing workers to claim a full 100% deduction for tipped wages when filing their taxes.
In a release, Senator Ted Cruz stated, "I've long believed the GOP should be the party of bartenders, of waiters and waitresses, and this bill is an important step to ensure we are addressing the economic needs of working Americans."
Notably, the bill has some bipartisan support, with Nevada Democratic Senators Jacky Rosen and Catherine Cortez Masto signed on as sponsors.
Cortez Masto said of the bill, “Working families in Nevada deserve a break, and this bipartisan bill will put more money in their pockets. This is one part of my comprehensive work to lower costs for working families and deliver for Nevadans across the state.”
The National Restaurant Association has also backed the revised No Tax on Tips Act, reportedly viewing it as a way to support workers in the industry.
Update: On May 20, the U.S. Senate passed the No Tax on Tips Act by unanimous consent. For more information, see New 'No Tax on Tips' Bill Approved: What to Know Now.
How tip income is taxed by the IRS
It's important to know that under current IRS guidelines, tips received by employees are considered federal taxable income. That includes cash tips, tips received via credit or debit cards, and the value of non-cash tips like tickets or other items.
- Employees are required to report all cash tips to their employer if the total tips for the month exceed $20.
- Employers then withhold income taxes, as well as Social Security and Medicare taxes, based on both wages and reported tips.
- Additionally, service charges mandatory fees added to a bill, are treated by the IRS as regular wages and are subject to the same tax withholdings.
Because of this, those arguing to eliminate taxes on tips point to a key potential benefit of increased take-home pay for some workers. Not taxing tips could provide financial relief to some workers in industries such as restaurants and hospitality, where base wages are often low.
Another related view is that by reducing the income subject to tax, workers who rely heavily on tip income might have more disposable income to cover living expenses and essentials, improving their financial stability.
Some data also indicate that many in the U.S. support the idea of tax-free tips. For example, a recent poll conducted by the polling and strategic consulting firm Redfield & Wilton Strategies found that 67% of Americans (across party lines) oppose taxing tips received by service workers.
Eliminating tip taxes: Downsides
Despite what would seem to be obvious benefits, some economists have raised the potential loss of federal revenue as a primary concern with no tax on tips proposals.
- The Committee for a Responsible Federal Budget estimates that exempting tips from income and payroll taxes could result in a revenue shortfall of $150 billion to $250 billion over the next decade.
- Some say that could exacerbate the national debt and strain government resources.
Other critics argue that the no taxes on tips policy may not effectively target those who need it most. A Yale University analysis found that only a tiny fraction of the workforce would benefit from the tax exemption, as many low-income workers already pay minimal or no federal income tax due to their earnings level.
There’s also an argument that employers should raise base pay to support workers relying on tips. And that focusing on tips could hurt efforts to raise the minimum wage.
Note: A study published earlier this year by researchers at the University of Michigan and Carnegie Mellon University found that increasing the minimum wage can benefit workers and businesses. The findings suggest that higher wages have been linked to better employee retention and increased profits for more efficient establishments in the restaurant industry.
Another concern is the potential for abuse. Eliminating taxes on tips could lead to employers reclassifying wages as tips to exploit tax benefits. Or, higher earners could take unfair advantage of the policy without proper safeguards like income limits.
Opponents argue these scenarios could create disparities among low-income workers and incentivize businesses to prioritize tips over wage increases.
Of course, there are the legislative hurdles. Implementing this policy would require legislative action. The proposal would have to pass a now-Republican-controlled Congress, which would have to agree on several tax proposals that Trump has said he'd like to see in one "big, beautiful [reconciliation] bill."
Tax on tips: Bottom line
Proposals to eliminate federal taxes on tips present potential pros and cons. While the idea promises increased earnings for service workers, it also presents challenges involving revenue loss and ensuring those who need tax relief the most get it.
However, whether the idea will become law remains to be seen. So, stay tuned.
Related
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
Is a New $25,000 Health Care Tax Deduction Coming in 2026?Tax Policy A proposal from GOP Sen. Josh Hawley adds to the chatter about health care affordability.
-
Are New Trump $2,000 Stimulus Payments Coming in 2026? What to Know NowTax Policy A promise of $2,000 tariff dividend checks is raising questions and fueling confusion.
-
Could Tax Savings Make a 50-Year Mortgage Worth It?Buying a Home The 50-year mortgage proposal by Trump aims to address the housing affordability crisis with lower monthly mortgage payments. But what does that mean for your taxes?
-
Emergency Tax Bill Ends $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.Tax Law Here’s how state tax conformity rules could immediately raise your income tax liability.
-
Standard Deduction 2026 Amounts Are HereTax Breaks What is the standard deduction for your filing status in 2026?
-
Three Popular Tax Breaks Are Gone for Good in 2026Tax Breaks Here's a list of federal tax deductions and credits that you can't claim in the 2026 tax year. High-income earners could also get hit by a 'surprise' tax bill.
-
Money for Your Kids? Three Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's FinancesTax Tips The Trump tax bill could help your child with future education and homebuying costs. Here’s how.
-
Key 2025 Tax Changes for Parents in Trump's MegabillTax Changes Are you a parent? The so-called ‘One Big Beautiful Bill’ (OBBB) impacts several key tax incentives that can affect your family this year and beyond.
