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Federal Tax

Trump Renews Call for Tax-Free Tips

Maureen Leddy  

· 5 minute read

Maureen Leddy  

· 5 minute read

President Donald Trump renewed his call to eliminate federal taxes on tipped income last weekend. Lawmakers have offered a few different approaches detailing how that might work — with some taking to heart concerns raised last year about the potential for abuse.

During last year’s presidential campaign, Trump told a crowd of supporters in Nevada that if elected, he would eliminate tax on tips. His opponent, Kamala Harris, later said she supported eliminating taxes on “tips for service and hospitality workers.” A narrower version of Trump’s proposal was incorporated into the 2024 Republican platform — that calls for no taxes of tips “for millions of Restaurant and Hospitality Workers.”

And on January 25, Trump, speaking to another crowd in Nevada, renewed his promise to cut taxes on tips. Trump called out restaurant workers, servers, valets, bellhops, bartenders, and caddies — but his proposal seemed broader than the Republican platform. Trump said that for any worker “who relies on tipped income, your tips will be 100% yours.”

Tip taxes. Under the Tax Code, tips of $20 or more received by an employee in any month from one job are treated as wages subject to withholding. Cash tips include those received directly from customers, via credit and debit card charges that are distributed to an employee, or via a tip-sharing arrangement. Employees must keep a daily record of tips received and report these to their employer.

Employers must withhold income taxes and the employee’s share of Social Security and Medicare (FICA) taxes based on wages and reported tip income and deposit this amount. Employers also must pay the employer portion of FICA taxes based on an employee’s total wages and tip income.

Reported tips also must be included on the employee’s Form W-2. For any unreported tip income, employees must use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount as additional wages on Form 1040.

Legislation. While Trump has spoken of a broad tax cut for tipped workers, recent legislative proposals have been more measured.

This session’s bicameral No Tax on Tips Act, backed by several Republicans as well as Nevada Democrats, would create a deduction for tipped income, capped at $25,000 per year.

The deduction would be available for workers in occupations “which traditionally and customarily received tips” — the bill also calls on Treasury to publish a list of such occupations within 90 days of the bill’s enactment.

The legislation also would limit the deduction for certain highly compensated employees. In addition, the deduction would be included in the list of deductions available to taxpayers who do not itemize, under Code Sec. 63(b).

Senator Ted Cruz (R-TX) and Representative Vern Buchanan (R-FL) led the bill introductions. However, the Senate bill (S. 129) is co-sponsored by Nevada Democrats Senators Jacky Rosen and Catherine Cortez Masto. And the House bill (H.R. 482), has the support of Nevada Democrat Representative Steven Horsford.

Meanwhile, Representative Don Bacon (R-NE) reintroduced his Tip Tax Termination Act (H.R. 558), which takes a different approach to limiting taxes on tipped income. Bacon’s bill would establish an exclusion from gross income for tipped wages up to $20,000. The exclusion would be available for a five-year period under the legislation.

Beyond a deduction or exclusion, during the last congressional session, Representative Thomas Massie (R-KY) offered a third approach to cutting tax on tips in his Tax Free Tips Act (H.R. 8785) — simply revising the Tax Code so tips are not treated as income.

Guardrails may be key. Over the summer, the proposals to eliminate taxes on tips set off a flurry of commentary by policy groups.

Beyond the fiscal impacts — the Committee for a Responsible Federal Budget (CFRB) estimated the 10-year cost of exempting tip income from federal income and payroll taxes at $150 to $250 billion — many groups were concerned about the potential for abuse.

According to the CRFB “exempting tip income from taxation would lead workers and employers to reclassify ordinary income as tip income where possible and could lead to a larger shift toward lower base pay and higher tipped income, more broadly.”

The Tax Foundation’s Alex Muresianu also cautioned of potential “behavioral responses” to eliminating taxes on tips. Those include “higher tips in existing tipped occupations” and “previously untipped occupations introducing tipping,” said Muresianu.

And looking specifically at last session’s version of the No Tax on Tips Act, Brendan Duke of the Center for American Progress, too, was concerned that there are “few, if any, guardrails to prevent high-income professionals such as hedge fund managers from shifting their compensation to a tax-free tipping model.”

Cruz and Buchanan appear to have taken the abuse concerns seriously. While the 2024 version of the No Tax on Tips Act (S. 4621/H.R. 8941) contained no occupational or income guardrails, the latest introductions do. Namely, this year’s legislation includes a $25,000 deduction cap and occupational and total compensation limits.

The potential for abuse has also been on Bacon’s mind; his bill limits the exclusion for tipped income to $20,000.

Having “a guardrail that prevented someone making tons of money [from] being able to claim tips” is key, Bacon told Checkpoint. “Where we put that I’m willing to discuss,” he said.

It’s unclear how these guardrails align with Trump’s broad promise last weekend. But Bacon said he believes in “negotiating and finding a spot where we can have a consensus.”

For more on current treatment of tips for income tax withholding purposes, see Checkpoint’s Federal Tax Coordinator ¶ H-4341. For more on payment of FICA tax on tips, see ¶ S-5534.2.

 

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