Former President Trump’s proposal to exempt all tips from federal tax has sparked a debate on its potential impact on tipped workers and the tax system. While this proposal could benefit a small number of waiters at high-end restaurants, the majority of tipped workers make such low incomes that they already pay little to no income tax. This raises questions about the fairness of exempting tips from tax, especially when other low-income workers are required to pay taxes on their wages.
The federal minimum wage for tipped workers is $2.13 an hour, with the basic combined hourly federal minimum wage and tip income at $7.25. State minimum cash wages for tipped workers vary widely, with many workers making so little that they do not meet the threshold for paying federal income tax under current law. This means that Trump’s proposal would only benefit a small subset of tipped workers, particularly those who earn significantly higher tips at upscale establishments.
While the highest-earning 10 percent of wait staff could potentially benefit from a tax exemption on tips, the majority of tipped workers, including those in lower-end restaurants, may not see any financial gain. In fact, repealing taxes on tips could undermine efforts to raise the cash minimum wage for tipped workers, as some workers may prefer tax-free tip income over a higher wage. This shift could disproportionately impact “back of the house” staff, such as dishwashers, who rely on tips but do not receive enough to support themselves or even pay taxes.
Another critical issue raised by Trump’s proposal is which taxes would be exempted on tipped income. While he mentioned repealing federal income taxes on tips, it remains unclear whether Social Security and Medicare payroll taxes would also be eliminated. Many low-wage workers pay more in payroll taxes than income tax, making these benefits crucial for their financial security. Without tax payments, these workers would lose access to essential Social Security and Medicare benefits, raising concerns about the long-term consequences of exempting tips from all taxes.
The challenge of taxing tips has long been a point of contention, with cash tips often going unreported and leading to tax avoidance. However, the widespread use of electronic payment methods in recent years has made it easier to track tip income and ensure compliance with tax regulations. While tipping practices vary globally, the US has seen a rise in customary tip amounts of 15% to 20%, with some workers relying heavily on this income to supplement their wages.
Trump’s promise to repeal the tip tax “right away, first thing in office” is not feasible without congressional action. The complexity of the tax system, combined with the potential implications of exempting tips from tax, calls for a thoughtful and comprehensive approach to addressing the financial needs of tipped workers and ensuring tax equity. As debates around minimum wage and tax reform continue, it is essential to consider the broader implications of any changes to the current system to protect the interests of all workers.
