Earlier this month, Sen. Ted Cruz (R-Texas), alongside Steve Daines (R-Mont.), Rick Scott (R-Fla.), and Kevin Cramer (R-N.D.) introduced the “No Tax on Tips Act,” which would exempt cash tips from federal income tax requirements, starting in 2025.
Now, President Trump has made the idea behind this legislation into a campaign promise, telling crowds at the Republican National Convention in Milwaukee that the idea stemmed from a server in Nevada, who allegedly lamented to the presidential hopeful that, “the government’s after me all the time on tips, tips, tips.” Trump said that she was a “very smart waitress” and concluded that “no tax on tips” was a “great idea,” alongside other tax cuts, though he declined to go into detail on these campaign promises.
If Republicans successfully amended the IRS code to eliminate income tax on cash tips, employees within the restaurant industry — as one of the largest tipped industries in the United States — could be impacted substantially.
“In 2024, an individual filing single with gross annual income from $0 to $11,600 pays 10% in taxes so, yes, even minimum wage workers would be impacted if the relief applied only to income taxes,” Denise Heekin, attorney at Bryant Miller Olive P.A., said. “Moreover, the ‘No Taxes on Tips Act’ proposes to provide a deduction to those individuals who itemize deductions on taxes as well as those individuals who do not itemize the deductions.”
Despite the name, ‘No Tax on Tips’ proposal does not actually eliminate all taxes from cash tips, as employers would still be required to pay their portion of the payroll taxes. Employees would also still be subject to any state taxes on their tips.
Even though the ‘No Tax on Tips’ legislation is a slight misnomer because it doesn’t include all taxes, the policy could still have a substantial impact on a server’s take-home pay because, according to the Center for Economic Policy Institute, “customer tips account for 71% of a tipped worker’s minimum wage, while the direct cash subminimum wage represents just 29%.”
The National Restaurant Association provided Sen. Cruz with thoughts on this legislation before it became a published bill. One of the concerns the business association originally had is that if tips are not taxed, then they won’t show up as income, which would impact restaurant workers’ in more than just their paychecks:
“That employee at the end of the year is only showing what they received in cash wages from the restaurant, so it’s going to show on paper that they really didn't make much money and that will affect their ability to get loans or get a credit card,” Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, said. “Then, what is the impact on their contributions to their social security trust fund? If they're only contributing based on the fact they're making $2.18 an hour, even though they were receiving $20 total with tips, they’re not going to get as many benefits when they retire from the industry. They're ultimately shortchanging the FICA system.”
The National Restaurant Association pushed the legislators to make sure the bill stipulates that the employer and the employee pay into that employee's FICA — Social Security trust fund payments.
The other issue critics of this legislation have brought up is that approximately half of tipped workers do not make enough income to pay federal income taxes. According to the Bureau of Labor Statistics, as of 2020, 1.5% of all workers are paid at or below the federal minimum wage, and 5.5 million of those workers are paid a subminimum wage or under the tip credit system. Generally, workers must make at least $13,850 or $27,700 per household in order to meet the income tax filing requirement.
“Roughly half of tipped workers do not make enough income to have to pay federal income taxes,” Kennedy said. “For the remaining half, it is a sizable portion of their income that is going to be free from federal tax… We ask, ‘is this going to promote more workers in other industries saying, ‘I'm going to check out being a tipped server because of this tax advantage?’ Access to employees remains one of our highest priorities for the restaurant industry, so this could go a long way in bringing more people into the industry.”
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