‘No Tax on Tips’ Legislation Could Affect 4 Million US Workers

Legislation eliminating federal income taxes on tips could provide some relief to around 4 million U.S. workers, CNBC reported Wednesday (May 21).

That is the number of workers — about 2.5% of all employees — who were in tipped occupations in 2023, according to the report. These occupations include those in restaurants, hotels and courier services.

The Senate passed a No Tax on Tips Act on Tuesday (May 20), by a unanimous vote, and a similar provision is included in a tax bill advanced by the House Ways and Means Committee last week, the report said.

Both pieces of legislation would require tips to be reported but would provide a tax deduction for the workers, per the report.

While the legislation would provide tax relief to some workers, it could create some issues, Alex Muresianu, senior policy analyst at the Tax Foundation, told CNBC.

A “good chunk” of tipped workers don’t pay federal income taxes because their earnings are lower than the standard deduction; the policy could lead to new occupations introducing tips and existing tipped occupations relying on tips more heavily; income could be misclassified as tips; and workers earning similar incomes in different occupations could be taxed differently, Muresianu said.

It was reported in March that Uber and DoorDash were working to make sure the legislation to remove taxes on tips would cover the independent contractors who work for them. At that point, the proposed legislation would exclude those workers because it tied eligibility to reports by employers that break out tips and wages.

Eliminating taxes on tips could hasten the shift to digital payouts, PYMNTS reported in November. Any change in tax mandates will move stakeholders to reexamine the burdens of collecting and accounting for cash payments and income reporting tied to that cash — such as the burden of lugging the cash to the bank — and will provide the psychological impact of getting more money into one’s pocket (because it’s untaxed).

Eighty-five percent of workers who receive instant tips digitally are highly satisfied with the real-time methodology, according to the PYMNTS Intelligence and Ingo Money collaboration, “Generation Instant: Hospitality and Tips.”