When campaigning, it’s crucial to come up with pledges that stick in the minds of voters. This election, the phrase “no tax on tips” seems to have achieved just that.
Both presidential candidates are making promises to eliminate taxes on tips for workers. However, experts caution that these proposals may be more about winning votes than actually addressing the needs of tipped workers.
According to David Cooper, a researcher at EPI Action, a nonpartisan organization, these proposals may not benefit many workers and could potentially harm more, with the real benefits going to employers and the wealthy.
How did the promise of no tax on tips become a part of the election?
Former President Donald Trump made the promise to end taxes on tips in front of service workers in Las Vegas on June 9. Vice President Kamala Harris also made a similar pledge in Las Vegas last weekend. It’s not a coincidence that both announcements were made in Las Vegas, as it’s an area dominated by the leisure and hospitality industry, according to Bureau of Labor Statistics data.
White House press secretary Karine Jean-Pierre stated that President Joe Biden also supports eliminating taxes on tips for service and hospitality workers, along with raising the minimum wage.
The proposal is certainly attractive to tipped workers and their unions. However, experts suggest that while the message may resonate with voters, the actual policy may not be as effective.
Kyle Pomerleau, a senior fellow at the American Enterprise Institute, describes the proposal as bad tax policy.
How do tips contribute to wages?
Tipped workers play visible roles in various industries such as service and hospitality. The Budget Lab at Yale University estimates that there are around 4 million tipped workers in 2023, making up about 2.5% of the U.S. workforce.
In order to qualify as a tipped worker, one must earn more than $20 per month in tips and receive a subminimum wage of $2.13 per hour, combined with tips to meet the federal minimum wage of $7.25 per hour.
Tip pooling is common in restaurants where tips are shared among front and back of house staff. All employees who receive pooled tips must earn at least the federal minimum wage.
Despite tipping being underreported, electronic payments have made it easier to track. However, compliance with wage rules in restaurants may still be an issue, according to Howard Gleckman from the Urban Institute.
How are taxes on tips handled?
The median weekly wages for tipped workers, including tips, are $538, compared to $1,000 for non-tipped workers. Many tipped workers earn so little that they are already exempt from federal income taxes.
It’s likely that only a small percentage of tipped workers would benefit from the tax advantage proposed by Trump and Harris, without specific income limit details.
Even if federal income taxes on tips are eliminated, workers and employers are still required to pay federal payroll taxes for Social Security and Medicare programs. State income tax requirements would remain unaffected.
It’s unclear if the proposals would only apply to federal income tax, but similar legislation by Sen. Ted Cruz suggests it would likely be limited to federal taxes.
The proposal to eliminate taxes on tips could potentially save a typical tipped worker a significant amount of money. For example, a server earning $19,000 in wages and $15,000 in tips would see their tax liability decrease from $2,096 to $440 under this policy. However, experts caution that this proposal may have negative repercussions, such as impacting social programs and other tax benefits for workers. Additionally, high earners could potentially exploit this loophole to avoid paying taxes on a portion of their income. Overall, experts believe that this policy could benefit employers more than workers, and may not necessarily lead to higher wages for employees. The proposal to exempt tips from federal income tax could potentially worsen the federal deficit, leading to broader repercussions for social programs like Social Security and Medicaid. Additionally, the policy may result in tipping backlash and fuel worker resentment, especially if certain industries or income levels are excluded. Critics argue that preferential tax treatment for tipped workers is unfair and that other low-paid workers in different sectors would not benefit from such a policy. Despite these criticisms, unions and business groups support the proposal, arguing that it would benefit workers who earn a subminimum wage. Ending the subminimum wage altogether, however, would have a more significant impact on tipped workers.
Employers nationwide must take responsibility for ensuring a fair minimum wage, while Congress plays a crucial role in enforcement.
Aside from simply increasing the minimum wage, experts suggest that there are additional strategies that could benefit low-wage workers. This includes broadening income support programs such as the child tax credit, the earned income tax credit, and Medicaid.
following sentence:
“I am not going to the party because I have a lot of work to do.”
I will not be attending the party as I have a significant amount of work that needs to be completed.