During
his
election
campaign,
former
president
Donald
Trump
called
for
eliminating
income
taxes
on
tip
income
for
restaurant
workers.
It
was
mostly
dismissed
as
an
unlikely
campaign
promise.
But
when
Vice
President
Kamala
Harris
also
promoted
this
idea
during
her
presidential
campaign,
there
was
speculation
such
a
proposal
could
one
day
become
law,
likely
as
part
of
a
bigger
tax
reform
bill.
Indeed,
a
bill
called
the
No
Tax
On
Tips
Act,
proposed
by
Sen.
Ted
Cruz
and
currently
in
Congress,
would
exclude
tip
income
from
income
and
employment
taxes.
While
the
bill
is
unlikely
to
immediately
pass,
it
provides
a
glimpse
into
what
can
happen
in
the
future.
Excluding
tip
income
would
provide
more
money
that
can
be
used
for
necessities
for
people
in
traditionally
low-paying
jobs.
This
may
also
stimulate
the
economy.
Despite
benefiting
working-class
Americans,
the
negatives
greatly
outweigh
the
positives.
In
the
past,
when
cash
was
the
preferred
method
of
payment
in
restaurants,
tips
were
directly
paid
to
the
server
rather
than
to
the
restaurant.
To
ensure
that
the
tips
were
part
of
the
payroll
calculations,
the
IRS
has
required
employees
to
report
their
tip
income
on
the
Form
4070
which
is
then
given
to
the
employer.
The
problem
was
that
many
restaurant
owners
did
not
know
about
this
requirement
and
simply
let
the
employees
keep
the
tip
money
and
deal
with
the
tax
consequences
themselves.
Nowadays,
due
to
the
increased
use
of
debit
and
credit
cards
in
restaurants,
tip
income
is
easier
to
track
and
report.
The
first
problem
is
that
it
will
make
the
tax
laws
more
complicated.
Thankfully,
many
years
ago,
the
IRS
defined
what
constitutes
a
tip
in
Revenue
Ruling
59-252.
For
a
payment
to
be
considered
a
tip,
the
payment
by
the
customer
must
be
voluntary
with
no
restrictions
and
not
subject
to
negotiation
or
dictated
by
employer
policy.
Generally,
the
customer
has
the
right
to
determine
precisely
who
shall
be
the
recipient
of
his
generosity.
For
example,
a
lawyer’s
contingency
fee
award
will
not
be
considered
a
tip
because
the
amount
is
generally
negotiated
prior
engagement.
States
may
opt
to
not
follow
federal
law
and
tax
tips
on
their
own
in
order
to
maintain
tax
revenue
and
unemployment
funds.
This
also
creates
problems
with
equity.
Restaurant
tips
are
paid
as
a
percentage
of
the
total
bill.
This
means
that
employees
of
expensive
restaurants
will
have
an
advantage
despite
more
or
less
providing
the
same
service.
Activists
might
pressure
expensive
restaurants
to
adopt
hiring
practices
that
promote
diversity,
equity,
and
inclusion
at
the
risk
of
being
review
bombed.
While
the
presidential
candidates
specifically
mentioned
tip
income
for
restaurant
or
food
service
employees,
the
tax
law
will
have
to
specifically
state
who
is
subject
to
tax-free
tip
income.
Otherwise
the
law
will
apply
to
everyone.
The
law
will
have
to
be
drafted
with
specific
and
precise
language
because
inaccurate
or
imprecise
wording
could
include
more
people
than
the
law
intended.
On
that
note,
other
trade
and
special
interest
groups
will
demand
that
other
professions
that
customarily
receive
tip
income
also
be
subject
to
tax-exempt
treatment.
As
Election
Day
approaches,
don’t
be
surprised
if
either
of
the
candidates
expand
the
list
of
people
and
professions
that
would
qualify
for
tax-free
gratuities.
Finally,
exempting
tip
income
from
taxes
will
hurt
Social
Security.
It
will
reduce
contributions
to
a
fund
already
in
danger
of
being
depleted.
Also,
from
the
employee’s
perspective,
this
may
be
their
only
contribution
to
retirement.
An
unfortunate
reality
is
that
most
people
in
jobs
with
tip
income
are
living
paycheck
to
paycheck.
If
their
income
is
not
subject
to
mandatory
contributions
done
through
employer
withholdings,
they
might
not
have
a
retirement
account
because
the
money
will
be
spent
on
food,
shelter,
medicine,
student
loans,
or
truffle-sprinkled
avocado
toast.
While
the
idea
has
good
intentions,
exempting
tips
from
income
tax
will
further
complicate
the
tax
laws,
incentivize
businesses
to
convert
to
a
tip-based
compensation
structure,
deprive
a
subset
of
people
of
future
social
security
benefits,
and
exacerbate
tip
culture.
Steven
Chung
is
a
tax
attorney
in
Los
Angeles,
California.
He
helps
people
with
basic
tax
planning
and
resolve
tax
disputes.
He
is
also
sympathetic
to
people
with
large
student
loans.
He
can
be
reached
via
email
at
[email protected].
Or
you
can
connect
with
him
on
Twitter
(@stevenchung)
and
connect
with
him
on LinkedIn.