Should people working in the service industry have to pay taxes on tips?

Author: Carolyn Dolcimascolo
Published: Updated:
sales tax

There’s always a lot of discussion about how much to tip, whether it is at a restaurant, hair salon, or dog groomer.

No matter how much you decide to give, U.S. Congressman Byron Donalds (R-FL) does not believe the individuals on the receiving end should have to pay taxes on that tip.

The Southwest Florida Representative filed a bill dubbed the “No Tax on Tips Act.” It aims to “amend the Internal Revenue Code of 1986 to eliminate the application of the income tax on cash tips through a deduction allowed to all individual taxpayers.”

Donalds’ bill is the companion to one filed by Sen. Ted Cruz (R-TX).

U.S. Capitol, Washington, DC

“Our bill allows taxpayers to claim a 100% above-the-line deduction at filing for tipped wages. Policymakers must put the needs and financial interests of hardworking Americans first,” added the Congressman.

Statistics provided by Donalds:

  • The restaurant and food service industry is the nation’s second-largest private sector employer, providing 15.5 million jobs – or 10% of the total U.S. workforce. In 2023, roughly 4 million employees, or about 2.5% of the entire American workforce, worked in tipped occupations.
  • Between January 2021 and May 2024, real average hourly earnings for all private sector employees decreased by 2.24%
  • Real median weekly earnings for full-time workers have also dropped by 2.14% from Q1 of 2021 to the Q1 of 2024 and real per-capita disposable personal income has decreased by 9.04% during the same period.

“By implementing a 100% above-the-line deduction for tipped wages, employees will pocket more of what they earn, be able to show their actual income to potential lenders and continue to accrue federal benefits without unintentionally qualifying for low-income safety net programs,” explained Donalds.

If the bill progresses and eventually becomes law, it “shall apply to taxable years beginning after 25 December 31, 2024.”

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Check it out and feel free to share your thoughts with us.

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