Trump and Harris say no tax on tips

Eliminating the income tax on employee tips — a promise made by both Kamala Harris and Donald Trump during the presidential campaign — could have far-reaching implications for both workers and many others Pursue that employ them.

TipsAs defined by the IRS, they are additional and discretionary payments made by customers to an employee. Cash and electronic payments as well as non-cash valuables such as tickets can be considered tips.

Tips can make up the majority of pay for certain employees, such as waiters, hotel clerks and entertainers. All tips will be counted as income collected by the IRS and subject to federal and state taxes.

During a June 2024 rally in Las Vegas, Trump proposed eliminating taxes on tips for “hotel workers and people who get tips,” adding, “We’re not going to raise taxes on … people who tip.”

Harris also pledged at her own rally in Las Vegas in August 2024 to eliminate taxes on tips while raising the minimum wage for tipped workers.

“I promise everyone here that when I am president, we will continue our fight for working families in America, including raising the minimum wage and eliminating tip taxes for service and hospitality workers,” Harris said.

Although neither candidate has clarified exactly how the tax would be eliminated, the proposal could be implemented by introducing a tax exemption for tips or other measures Deduction above the line like Texas Senator Ted Cruz recently suggested.

How eliminating the tip tax could affect small businesses

Tipped the workers According to the Budget Lab at Yale, they make up about 2.5 percent of the workforce. Waiters, bartenders and other tipped workers can receive a national salary Minimum wage of $2.13 per hour, with the expectation that they will earn more tips.

With this in mind, eliminating taxes on tips has both advantages and disadvantages.

Pro: More net wages for employees without a salary increase

While more companies are paying their employees minimum wage or more and making tipping optional, many companies still rely on the tipping model to pay their employees and attract workers.

Eliminating a tax on tips would allow workers to take home more pay, giving them more money in their pockets and potentially reducing the need for business owners to increase their employees’ tip wages. This may also increase employee satisfaction and financial security.

Pro: Alleviating labor shortages

With a potentially higher take-home salary, companies may also find it easier to recruit tipped employees than salaried or hourly employees. According to Bankrate’s Paycheck-to-Paycheck survey, many industries that rely on tipped service and hospitality workers are having difficulty recruiting employees, with one in four workers (24 percent) saying they feel not being adequately compensated.

Con: Negative customer sentiment regarding tips

Bankrate’s tipping survey found that three in five Americans (59 percent) express negative attitudes toward tipping and 37 percent say business owners should pay their employees better wages instead of relying on tips. Overall, the survey results suggest that eliminating the income tax on tips could backfire. If customers believe that the tax burden is lower for tipped employees, they may tip less to save money.

Disadvantage: Impact on state taxes, Social Security and Medicare

It is also unclear whether the repeal would also apply to state taxes. While states have the right to set their own income taxes, neither candidate has indicated whether the change would apply to tax law. If this occurs, it could have a significant impact on state tax revenues and could take some time for states to come to terms with.

The exemption from tip tax can also have an impact social security And Medicareas these are deducted from wages as a tax and benefits are distributed based on contributions.

Bankrate’s expert opinion on eliminating tips taxes

While eliminating the tip tax sounds like a good deal for both workers and businesses, Mark Hamrick, senior economic analyst at Bankrate, warns that the impact may be limited and could have unintended consequences.

“The percentage of workers that would be covered by this proposal is relatively small,” Hamrick said. “It could force some companies to try to introduce tipping to shift the burden of labor costs. But this could also make consumers who are already tired of being asked for tips at fast-casual food restaurants and cafes even more resistant.”

The end result

Eliminating the tip tax could put more money back in the hands of workers and ease small businesses’ recruiting woes, but it may not be a universal good.

Each candidate, if elected, will likely have their own approach to implementing the tax, potentially ironing out the finer points of implementation – although no tax on tips may still have long-term consequences for the worker satisfaction that the Company set wages etc. has how customers respond to tips.