No-Tax Status May Spur Shift From Cash to Instant Digital Tipping

New legislation recently passed in Congress eliminates federal taxes on tips — and one ripple effect is that there should be further tailwind for those tips to be paid out digitally rather than in cash.

For restaurants, hotels and a host of other businesses, the daily divvying up of cash tips, parceled out to shift (and other) workers has become a mainstay of take-home pay. The onus has been on workers and employers to report those cash tips on tax filings, since tip-related income is treated as, well, income.

As seen on the IRS website, as current policy stands, employees must keep a daily tip record; report tips to the employer, unless the total is less than $20 per month per employer; and report all tips on an individual income tax return.

In at least some cases, underreporting happens as a result of the cash payouts and the desire to keep at least some money for oneself and away from Uncle Sam. Exact figures are hard to come by. But in one (admittedly old, from 2018) report from the Treasury Inspector General for Tax Administration, the tally came in at about $23 billion for a single tax reporting year.

What’s Changing

As for the new tax landscape, the Senate passed the No Tax on Tips Act this week, and the tax policy is on the table in the House bill passed by a single vote on Thursday (May 22).

Starting next year, income derived from tips paid out in cash (as in tangible bills and coins) or via credit and debit cards would be exempt from federal income taxes. The income would be deducted from “above the line” gross income, which in turn lowers taxable income.

It’s important to note that the tips themselves still must be tracked, and they still must be reported (again, as they must be included “below the line”). The employers, as has been standard, get a tax credit, commensurate to the Medicare and Social Security taxes paid on tips (which count as wages).

The impact would be significant for the tipped workers, as the legislation lets them deduct up to $25,000 in tips, assuming their incomes fall below a $160,000 threshold.

Critics charge that the policy is flawed: In this analysis from the Tax Foundation, there’s the scenario put forth where an increasing number of workers and employers may shift to business models that are tipped based due to the tax implications; meanwhile, the government would take in less in terms of taxes.

PYMNTS detailed earlier this month that two in five American consumers are actively earning money outside their primary job, which includes occupations such as ride-share driving and project work that could include tipping as a key income component.

A higher proportion of workers and businesses moving to tips may see some pushback. PYMNTS Intelligence found last year that 29% of consumers said tipping had gotten “out of hand” and that 17% of consumers had cut spending due to tips.

The Instant Advantage

Better record keeping and tracking of income — done automatically in terms of back-end reconciliation — will be critical as businesses and workers move to embrace the tax reporting changes.

The rise of digital platforms and instant disbursements will help hasten the shift away from cash.

PYMNTS Intelligence and Ingo Payments found that, as has traditionally been done, card payments have been added to checks, and then turned into cash at the shift’s end. In the case of restaurants, the establishments have been including tips in weekly payroll, which we wrote is “a concession that means payments are far from instant and only received days later.”

Eighty-five percent of workers who have received digital, instant payouts have expressed satisfaction with that choice.

The data shows that 81% of hospitality workers choose instant payments for their convenience, while 74% choose instant because they want to secure their funds — and quickly.