President Donald Trump has proposed a plan to eliminate federal taxes on tips, aiming to increase take-home pay for workers in the hospitality and service industries. This initiative is part of a broader tax reform agenda that includes removing taxes on overtime pay and Social Security benefits.
Under current federal law, tips are taxable income, subject to income and payroll taxes. Employees must report tips to their employers, who then withhold the appropriate taxes. Trump’s proposal seeks to change this by exempting tips from federal taxation, allowing workers to retain the full amount of their gratuities.
Supporters argue that this policy would provide financial relief to millions of workers who rely on tips as a significant portion of their income. For instance, during a rally in Las Vegas, Trump emphasized that eliminating taxes on tips would directly benefit service workers, enhancing their earnings.
However, the proposal has sparked debate among economists and policymakers. Critics warn that exempting tips from taxation could lead to unintended consequences, such as employers reducing base wages and anticipating that employees will make up the difference through untaxed tips. Additionally, there’s concern that this policy might incentivize businesses to reclassify regular wages as tips to exploit the tax exemption, potentially leading to tax avoidance and reduced revenue for federal programs.
Financially, the impact could be substantial. Analyses suggest that exempting tip income from federal taxes might reduce federal revenues by $150 to $250 billion over a decade. But, without the details, knowing the exact impact is impossible.
Three bills have been introduced (not passed) by either part of Congress as of February 6:
- Senator Ted Cruz (R-TX) and Buchanan’s No Tax on Tips Act(129/H.R.482) would establish an income tax deduction for qualified tips — but this year’s version of the bill has a cap ($25,000) and other limitations (only traditional occupations such as waiters, hospitality workers, and beauticians).
- Representative Don Bacon’s (R-NE) R.558 would establish an exclusion from gross income for tipped wages up to $20,000 instead.
- Beyond a deduction or exclusion, during the last congressional session, Representative Thomas Massie (R-KY) offered a third approach to cutting tax on tips in his Tax-Free Tips Act (R. 8785) — simply revising the Tax Code so tips are not treated as income.
These proposed bills vary widely regarding the economic effect – imposing a cap versus exempting tips from income. The future of tip taxation remains uncertain. With multiple bills in play, the outcome will depend on legislative action and its broader economic impact.
