No Tax on Tips?
Tipping, oh such an American cultural norm. We love to tip for good service, and for waitstaff, hair stylists, delivery drivers, taxi and ride share drivers it is obligatory. For limited or self-service applications, perhaps not so much. Being intimidated by a touch screen suggesting a 20%, 25% or 30% gratuity is a discussion we can leave for another day. As a restaurant industry veteran for more years than I’d like to admit, I’ve long been a proponent of any policy that helps our hard-working staff. But is no tax on tips good policy?
In 2023, there were roughly 4 million U.S. workers in tipped occupations, representing 2.5% of all employment, according to estimates from The Budget Lab at Yale University.
According to the Fair Labor and Standards Act, a tipped worker is defined as one who “customarily and regularly” receives $30 or more in tips monthly, a wide definition that encompasses millions of Americans. Tipped workers tend to be younger — the median age is 31, compared to 41 for the median non-tipped worker — and earn lower wages, the Budget Lab found.
Of the more than 2 million food servers across the country, half earn less than $37,000 a year, according to the Bureau of Labor and Statistics. Those workers can largely claim the standard deduction, reducing their tax burden. But they also likely can claim other forms of tax relief, such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
More than a third of tipped workers didn’t make enough money to pay federal income taxes last year, Yale Budget Lab found, even before tax credits like the EITC or the CTC.
Compliance for reporting tips is spotty at best. In 2006, the most recent year for which data exists, the IRS estimates employees didn’t report about $23 billion in tips, or about half of the $44 billion in estimated tip income.
At the risk of upsetting my friends at the National Restaurant Association, arguing for no tax on tips might be more politically expedient than prudent tax policy. Further, perhaps it is time to increase the minimum wage for tipped employees which in most states is far lower than standard minimum wage. The Federal rate remains at $2.13 per hour.
From a fairness perspective shouldn’t tipped employees be paid the same minimum wage as non-tipped employees? By increasing the minimum wage for tipped employees, it could create a more equitable, stable, and fair working environment for those in industries that rely heavily on tipping.
Many tipped employees, such as waiters, bartenders, and valets, rely heavily on tips to reach or surpass the minimum wage. If tips are inconsistent, they might fall below a living wage. Increasing their base pay ensures a fairer baseline income. On the gender equality perspective, women are disproportionately affected as they represent a large proportion of the tipped workforce, and raising the minimum wage would help narrow the pay gap between men and women. Many tipped positions are also associated with lower-paying industries, where women are overrepresented.
By increasing the minimum wage for tipped employees, we could create a more equitable, stable, and fair working environment for those in industries that rely heavily on tipping.
Just sayin’