There Are Better Ways To Help Restaurant Workers Than No Tax on Tips
When Donald Trump climbed onto stage at a Nevada campaign rally in June 2024 and pledged “no taxes on tips,” his proclamation was brushed off by many pundits as the usual Trumpian stump speech improvisation. Just over a year later, what was once dismissed as farcical has now become the law of the land with the passage of the One Big Beautiful Bill Act (OBBBA). But the policy wisdom of tax-free tips is still open for debate.
Under the OBBBA, workers can treat tips as an above-the-line deduction for the first $25,000 in tips they receive. The deduction will apply to federal income taxes, but not federal payroll taxes, and it will phase out for workers making over $150,000 individually or $300,000 jointly. Like many of the other tax breaks, it is also temporary, expiring in 2028.
While this deduction will no doubt allow many servers to take home more of their tips, the implementation details show the limitations of the tax break. The deduction is meant to apply to occupations that “customarily and regularly receive tips”—a list of which will be developed by the Treasury Department and the IRS.
This promises to inevitably create certain winners and losers, depending on what industry someone works in. Restaurant and hospitality workers will obviously make the cut, but what about occupations in which tipping is sporadic but still present? Jobs like being a handyman or car mechanic, depending on the circumstances, can involve tipping but may fall short of the “regularly” or “customarily” criteria. But is a working-class handyman any less deserving of a tax break than a waiter at a Michelin-starred restaurant?
Another wrinkle is that tips are deemed “qualified” for the tax break only if they are “paid voluntarily without any consequence in the event of nonpayment” and are “determined by the payor.” As numerous tax attorneys have already pointed out, this will exclude situations like restaurants attaching mandatory gratuity to parties of a certain size, as many establishments do—another seemingly arbitrary distinction given that one or two fewer guests at a table could be the difference between a server paying taxes on their tips or not.
Details aside, the push for tax-free tips overlooks better ways to help tipped employees. As tips are becoming tax-free at the federal level, states and localities continue to push bans on the tippe
Article from Reason.com
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