There’s a new angle to the tip debate now.
People in the U.S. are thinking about which workers to tip and how much to pay them. Former President Donald Trump says that people who get tips shouldn’t have to give the IRS any of their money.
At an event in Las Vegas on Sunday, Trump said that if he wins the election, he will work to stop the federal government from taxing tips.
In a state with a big leisure and hospitality industry, he said, “This is the first time I’ve said this, and hotel workers and people who get tips, you’re going to be very happy. When I get to office, we are not going to charge taxes on tips.”
Could the tax rules for tip money really go away at a time when many other tax rules are about to end by the end of 2025? Or, as some critics say, is this just Trump’s fancy talk to get back to the White House?
How does the IRS tax tips?
The IRS says that tip money is normal taxable income, and it doesn’t matter how the money gets to the person who is owed it. The tax office says it is subject to income taxes and payroll taxes for Medicare and Social Security.
Cash, debit card, and credit card tips are all forms of income for workers. It also includes money that employees split between them or that an employer gives them in tips. Tip money that isn’t cash, like tickets, passes, and other valuable items, is also income that needs to be taxed.
As per the IRS, the money a worker gets from a service charge—for example, when a restaurant requires a tip for groups over a certain size—is taxed the same way as other tips and regular income. It is not called tip income.
According to the IRS, workers must tell their bosses about their tips so that their bosses can take out enough money for income and payroll taxes. It tells workers to keep a “tip diary” to keep track of their money. For people to have to report tip income to their boss, the IRS says they need to make at least $20 a month.
The IRS says that people who don’t report all of their tips to the taxman could have to pay more taxes and face other financial penalties.
IRS data from 2018 shows that taxpayers reported $38.3 billion in tips. Erica York, senior economist and research director at the Tax Foundation, a center-right think tank, says this is true.
York pointed out that the more than 6 million people who put tips on their tax returns that year put in an average of almost $6,250.
Nevada is one of only a few states that doesn’t have an income tax, so tips aren’t taxed at the state level.
Of course, some states tax tips as income. In New Jersey, there is Atlantic City instead of Las Vegas in Nevada. However, in New Jersey, tips are considered wages and are taxed as such.
What are the chances Congress changes tax laws on tips?
A spokeswoman for Trump’s campaign said that if he wins, he will ask Congress to pass a law that takes taxes out of tips.
Trump wants to stop taxing workers’ tips at the same time that large parts of his signature tax bill, the Tax Cuts and Jobs Act of 2017, are set to expire at the end of 2025. The law, among other things, lowered the top tax rates for most people while raising the standard deduction, the child tax credit, and the amounts that high earners could leave without having to pay the estate tax.
Based on what York says, the 2017 Trump tax cuts did not change how tips are taxed.
The fact that the law is about to end makes it possible for a big debate about what should happen next with the tax code. Trump wants his Tax Cuts and Jobs Act to last forever. One estimate says that would cost the government $4 trillion over 10 years.
Kyle Pomerleau, a senior fellow at the right-leaning American Enterprise Institute, says it’s unlikely that tips will get out of paying taxes no matter what.
“There is no good policy reason for it.” He told MarketWatch, “It’s all about politics, and I don’t think lawmakers are looking for even more ways to price up a 2025 tax bill.”
York agrees. “In the big picture, this is not a good idea or a good way to lower taxes,” she said. “It is not principled tax policy to exempt different types of income from the income-tax base.”
Ted Pappageorge, secretary-treasurer of the Culinary Workers Union Local 226, said in a statement that Trump’s promise of “tax relief for tip earners” was nothing more than a “wild campaign promise.” Along with Bartenders Union Local 165, the union speaks for about 60,000 workers in Las Vegas and Reno.
People in the US are tired of tipping.
There may be a time in American life when many people want to cut back on tips, and Trump wants to take those taxes out of them.
A recent report from Yelp YELP, -0.87% says that the fact that people are talking about tips a lot in restaurant reviews shows how aware and tired people are of the subject.
In the meantime, a recent Bankrate poll found that 59% of people don’t like tipping. The poll found that 37% of people think employers should pay their workers more in wages instead of depending so much on tips, while 33% think the culture of tipping is getting out of hand.
Of course, wages are taxed too, just like tips.
