Former President Trump’s proposal to exempt all tips from federal tax may benefit a few tipped workers in high-end restaurants, but it could potentially harm many others. While tipped workers in hospitality industries stand to gain from this proposal, those in other professions also qualify as tipped workers and may not experience the same benefits. The federal minimum wage for tipped workers is currently set at $2.13 per hour, with an hourly federal minimum wage and tip income combined at $7.25. However, state minimum cash wages for tipped workers can vary widely, with many making such a low income that they already pay little to no federal income tax under current laws.
For lower-income tipped workers, Trump’s proposal may not have much of an effect on their tax burden as they might already be eligible for benefits like the Child Tax Credit or the Earned Income Tax Credit, allowing them to pay little to no federal income tax. On the other hand, for higher-earning wait staff in upscale restaurants who make a significant amount in tips each year, Trump’s plan could provide substantial benefits. The top 10% of wait staff reportedly make $60,000 or more annually, primarily in tips, and could potentially benefit greatly from tax-free tips.
However, the repercussions of Trump’s proposal could be detrimental for most tipped workers. It is uncertain how customers would react to tax-free tips, with some potentially reducing their gratuities. This proposal could also diminish efforts to raise the minimum wage for tipped workers, with some fearing that the allure of tax-free income might dissuade workers from advocating for better cash wages. This could adversely impact service workers in lower-end restaurants who rely on tips as a significant source of income, especially for “back of the house” staff like dishwashers.
Another concern is what taxes Trump’s proposal would exempt for tipped workers. While he mentioned repealing taxes on tips, it is unclear if this includes federal income tax or Social Security and Medicare payroll taxes as well. Many low-wage workers pay more in payroll tax than in income tax, and exempting these taxes could mean losing crucial benefits such as Social Security and Medicare. Additionally, while taxing tips has historically been challenging due to widespread cash tip underreporting, the rise of credit cards and mobile payment methods has made tracking tips and taxes easier.
While Trump stated his intention to repeal the tip tax immediately upon taking office, only Congress has the power to make changes to federal taxes. It is argued that exempting tips from taxes goes against principles of tax equity, as all workers, regardless of their income sources, should be subject to the same tax obligations. Ultimately, Trump’s proposal may not be as beneficial as it seems, with potential negative consequences for the majority of tipped workers who rely on tips as a significant portion of their income.
