Last year’s presidential campaign effectively used the slogan, “There’s no tax on tips.” It was concise and catchy.
However, the underlying tax policy is a bit more intricate.
On Tuesday, the Senate passed the No Tax on Tips Act unanimously. This follows commitments from both President Trump and former Vice President Kamala Harris to exempt certain workers from taxation. Up to now, tax credits are part of the substantial budget bill proposed by House Republicans for implementation between 2026 and 2028.
So, what does this mean for workers and diners in the food industry? To find out, I gathered insights from tax specialists, hospitality educators, and various industry groups:
How are restaurant employees taxed on tips currently?
Federal regulations mandate that all tips must be reported as income. This means whether it’s a cash tip handed directly to a server or added to a bill, both employees and employers must keep track and report every cent. This rule applies irrespective of whether the tips are kept by individual servers or pooled.
What qualifies as a tip?
According to tax law and this new Act, “cash tip” refers to money given in cash, on bills, or through cards, including electronic payment services. There’s still no clear answer on whether tips sent directly via apps like Venmo or PayPal will be treated as cash. Additionally, service charges imposed by businesses in certain areas are not considered tips.
What changes are being proposed?
The current negotiations in the House propose that income from tips would be exempt from federal income tax. This would be deducted as a “line item” on the tax return, thus decreasing taxable income. It’s essential that tips are still tracked and reported.
Who will benefit from this deduction?
There’s a bit of debate regarding who stands to gain from this legislation, as it applies to servers, baristas, food delivery drivers, and those who handle payment processes after food sales. Government data indicates there are over 2 million workers in the restaurant sector in the U.S. who rely on tips.
