Tipped Workers May Receive Tax Breaks from the Proposed "Large, Attractive Tax Bill" soon. Here are the key points.
In a recent development, President Trump's budget package proposes a tax exemption on tips, aiming to provide a tax break for income earned through tipping, a significant portion of earnings for service industry workers. However, the impact of this policy on low-wage workers, who typically rely heavily on tips, is a subject of debate.
For low-wage workers who rely on tips, such as restaurant servers, bartenders, and other tipped employees, this exemption could potentially reduce their overall tax burden by not taxing their tip income. This could increase their take-home pay and improve financial stability. However, an analysis of the proposal suggests that the most significant beneficiaries would be higher earners within the tipped workforce, as they receive larger total tip amounts.
The tax exemption targets low-wage tipped workers, but benefits would largely accrue to those who earn the most in tips. This means higher-earning workers in tip-intensive industries could see the largest tax savings, while lower tip earners might see smaller absolute benefits. For instance, low-wage servers at many restaurants would qualify for the tax break, but fast-food employees, who earn similar incomes, would not.
As of 2023, approximately 4 million people, or 2.5% of the American workforce, work in tipped jobs. However, only about 4% of workers who earn less than $25 per hour also receive tips. This indicates that the majority of low-wage workers are not tipped workers and would not benefit directly from the tax exemption.
Economists and labour advocates have expressed concerns about the proposal. Ernie Tedeschi, the director of economics at the Yale Budget Lab, stated that a deduction for tipped work is a poor way to help low-wage workers. Sylvia Allegretto, senior economist at the Center for Economic and Policy Research, echoed this sentiment, stating that the tax break would not touch the lion's share of low-wage workers because they are not tipped workers.
On the other hand, a June survey by the White House revealed that 83% of hourly workers support eliminating taxes on tips. The nonpartisan policy research center, Yale Budget Lab, notes that over a third of tipped workers in the U.S. are already exempt from federal income tax due to low earnings.
The problem for low-wage workers, according to labour advocates, is not high taxes but low earnings. The proposal to eliminate taxes on tips would mainly benefit higher and middle earners, not the majority of low-wage workers. As the debate continues, it remains to be seen how this proposal will impact the financial well-being of America's service industry workers.
[1] Source: White House budget proposal [2] Source: Economic Policy Institute analysis of the proposal
- The tax exemption on tips, proposed in President Trump's budget package, aims to reduce the tax burden of low-wage workers in the service industry, such as restaurant servers, bartenders, and other tipped employees.
- However, analysts argue that the benefits of this policy may primarily accrue to higher-earning workers within the tipped workforce, rather than low-wage earners who typically depend on tips for a substantial portion of their income.
- In fact, less than 4% of workers who earn less than $25 per hour also receive tips, indicating that the majority of low-wage workers are not tipped workers and would not benefit directly from the tax exemption.
- Economists and labor advocates have criticized the proposal, suggesting that a deduction for tipped work is a poor way to help low-wage workers, as the tax break would not significantly assist the majority of low-wage earners who are not tipped workers.
