The No Tax on Tips Movement is gaining momentum as both Republican and Democratic leaders propose legislation to eliminate federal taxes on tipped income.
Under the proposed No Tax on Tips Act, introduced by Senator Ted Cruz, employees and employers would still be required to pay a 7.65% payroll tax on tipped income, which funds Social Security, Medicare, and unemployment insurance. Another initiative, the Tax-Free Tips Act of 2024, seeks to exempt tips from both income and payroll taxes entirely. Critics argue that these proposals lack necessary safeguards and could allow high-income earners to exploit the system.
Economists and tax experts have raised concerns about the fairness and effectiveness of these tax proposals. They worry that high-income individuals could manipulate the system by converting a portion of their income into tips, resulting in significant tax cuts. The proposed legislation could also encourage tipping customs in various service sectors, making it challenging to distinguish between legitimate tips and restructured wages.
In response to the GOP's initiatives, Representative Steven Horsford has introduced the Tipped Income Protection and Support (TIPS) Act. This legislation aims to exempt tips from federal income tax up to a threshold of $75,000 and eliminate the subminimum wage for tipped workers. Labor unions, such as the Culinary Workers Union Local 226, support the TIPS Act and argue that addressing both tax relief on tips and the elimination of the subminimum wage is crucial for improving the financial situation of low- and middle-income workers in the service industry.
The National Restaurant Association supports the idea of tax relief for tipped workers but has concerns about eliminating the tip credit and the subminimum wage. Many servers currently earn more than the minimum wage due to the tip credit system. The association emphasizes the complexity of the issue, as stakeholders navigate the balance between fair compensation for workers and the viability of businesses in the service sector.
While the proposed tax breaks for tipped workers may seem beneficial, they primarily target a small segment of the workforce. Only 2.5% of the total workforce in the U.S. are classified as tipped employees. Critics argue that the legislation fails to adequately support the majority of low-wage workers who do not receive tips. Additionally, many tipped workers already have no federal income tax liability due to their low earnings, which diminishes the impact of the proposed tax relief.
As discussions continue, the ongoing debates surrounding tipped income taxation will likely shape the economic realities for millions of workers across the country. Lawmakers and advocates are focused on creating a more equitable system for all workers by addressing tax policy, wage structures, and labor rights.