There Are Better Ways To Help Restaurant Workers Than No Tax on Tips
Helping servers takes more than a temporary tip tax break.
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 tipped wage credit for many occupations. The tipped wage credit is what allows workers in tipped industries to be paid below the minimum wage so long as their tips make up the difference (otherwise, the employer must step in and pay the full minimum wage).
Blue states like New York, Connecticut, and Illinois have considered eliminating the credit and hiking minimum wages for workers, while the District of Columbia prominently made headlines with a successful 2022 ballot initiative in which residents voted to eliminate the credit.
Washington's situation is particularly illustrative because the minimum wage hikes and credit elimination for the district's servers resulted in restaurants in the city instituting "service" fees of 10–20 percent onto customer bills. At the same time, data suggested that servers were earning less in the wake of the change and that full-service restaurants in the district were being forced to cut staff as a result of the higher labor costs they faced. The blowback from the law was so significant that the D.C. city council stepped in this year to pause implementation of the wage hikes for servers—which were staggered to increase over time—and now may opt for outright reversal of the hike.
The experience in Washington, D.C. shows the importance of the tipped wage credit to both restaurants and restaurant workers, and that protection of the credit should be a policy priority on the right. Organized campaigns like One Fair Wage are dedicated to upending the tipped wage structure in localities across the country, and if successful, fewer and fewer restaurant and hospitality workers might be receiving tips in the first place as more establishments will be forced to move to traditional minimum wage compensation structures (and correspondingly higher menu prices).
In addition to playing policy defense to protect tipped wages, proactive policy ideas like a portable benefits model should also be explored in sectors that rely on tipped employees. One of the most frequent criticisms of restaurant and hospitality work is that workers in these industries often lack access to benefits.
This is a similar dynamic to that seen in the gig economy, which suggests the potential for a novel solution to this issue. States like Pennsylvania, Maryland, and Georgia have partnered with gig platforms to initiate pilot programs that create a system of portable benefits for gig workers, such as Uber drivers or DoorDash deliverers. These systems can take many forms, but one idea is to utilize SEP-IRA-style funds that both employers and workers can contribute to, and which the workers can then use to obtain paid sick leave, unemployment insurance, health insurance, and other benefits.
A portable benefits setup should be explored in the restaurant and hospitality industry as well. In fact, a "grand bargain" could be struck, in which the tipped wage structure is protected at the same time a portable benefit system is established. This would allow these workers to maintain their tipped compensation structure while also having more potential access to employment benefits.
Given that tipped wage work comprises much of the lifeblood of the American middle class, it's understandable that politicians would want to help these workers. But there are better ways to do that than a temporary tax deduction on tips.
