What if Tips Weren’t Taxed?

When you eat at a restaurant, and tip on your bill, those tips, earned by the restaurant staff, count as taxable income. Now politicians, including presidential candidates Vice President Kamala Harris and former President Donald Trump, are proposing to eliminate taxes on tips.

But what would this actually mean?

The Tip Tax Impact

The hope is to enable workers who rely heavily on tips, such as waitstaff, to keep a larger percentage of their take-home pay. Reducing taxes for jobs typically held by low-wage workers may be a promising prospect for many Americans.

However, the impact of such a policy could be more muted than expected, according to an analysis from the Yale Budget Lab. Tipped occupations make up just 2.5% of all employment, and more than a third of these workers had annual wages below the income threshold to require them to pay any federal income taxes in 2022. Changing the policy on tip taxation also doesn’t address another key factor: Jobs reliant on tips often make less than a living wage.

Eliminating taxes on tips also has the potential to create a loophole for higher earners, who may classify more of their income as tips to avoid paying taxes, an Axios report suggested.

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