Now that more details are coming out about the Republican budget – lets talk about that No Tax on Tips promise. It shouldnt be surprising that it looks a lot less appealing in the light. This proposal – originally part of the Trump campaign and now being considered by Congress – aims to exempt tips from federal income tax.
The idea has gained traction with politicians from both sides and could potentially become law in 2025. Here’s what you need to know about how it would work:- Workers would still pay payroll taxes (Social Security and Medicare) on their tips – these make up almost 25% of government revenue and aren’t going anywhere.- The exemption would apply only to federal income tax on tips – not all taxes.- Workers would likely still have taxes withheld throughout the year – they’d claim the exemption when filing their tax returns.
So, if you were expecting to get a bigger paycheck – thats not gonna happen. Why It Mostly Benefits Higher EarnersDespite being marketed as help for working-class Americans – this policy has some serious issues:1. Many low-income tipped workers already pay little to no federal income tax – so they’d see minimal benefit.
About 37% of tipped workers have incomes so low they already owe zero federal income tax. So – those workers would get nothing. 2. The biggest winners would be high-end servers and bartenders at expensive restaurants and private clubs – they’d get much larger tax breaks than someone working at Denny’s or IHOP.3.
Without proper guardrails – high-income professionals like lawyers – consultants – and financial advisors could restructure their fees as “tips” to avoid taxes. Some versions of the bill have no safeguards against this.4. It creates unfair treatment between workers. As one analysis put it: “If her friend John makes the same $40,000 per year working at a clothing shop – he would see no benefit from the policy.”The policy could actually harm workers in several ways:- Employers might use the tax break as an excuse not to raise base wages – “Why should I pay you more when you’re already getting tax-free tips?”- It could undermine efforts to eliminate the federal tipped minimum wage – which has been stuck at $2.13 per hour since 1993.- States implementing these policies are discovering they cost far more than expected – Alabama’s overtime tax exemption was projected to cost $34 million annually but ended up reducing state revenue by $230 million in its first year.- Lost revenue means less funding for schools – roads – and anti-poverty programs.
Some proposals include caps to limit abuse – like Connecticut’s bill that would still tax those earning over $100,000 in tips – but these aren’t universal. The bottom line? A tax break that sounds good on paper but mostly helps those who need it least – while potentially undermining worker protections and public finances.
As always – when something sounds too good to be true – it probably is.