CNBC.COM
President Trump's pledge to end taxes on tips is one step closer to becoming law.
On Tuesday, Senate Republicans narrowly approved their version of President Donald Trump's multi-trillion-dollar tax and spending package in a 51–50 vote, with Vice President JD Vance casting the tie-breaking vote.
One key provision in the bill would create an above-the-line deduction for tips earned by workers in occupations that traditionally receive tips. That means a bartender, for instance, would be able to deduct the total amount of their tips from their taxable income in a given year.
A few restrictions apply, however. The approved Senate version phases out for individuals making more than $150,000 a year, or $300,000 a year for joint filers, and it expires after 2028. The deduction is also capped at $25,000.
The exemption also applies only to federal income tax. Tipped workers would still be subject to state and local income and payroll taxes.
Currently, tips are treated as regular income and must be reported along with wages on a worker's W-2 form. "That's the way the law has been for decades," Lawrence Pon, a certified public accountant and certified financial planner in Redwood City, California, told CNBC Make It in May.
If enacted, the provision would mark a major shift by allowing tipped workers to deduct tips directly from their total income.
What no taxes on tips means for workers
About 2.5% of the U.S. workforce, or 4 million workers, held jobs where tips are common in 2023, according to an analysis by the Yale Budget Lab. Of those, about 60% of households with tipped workers would receive a cut, according to the Tax Policy Center — one that would amount to about $1,800 per household per year.
However, the proposed tax cut would primarily benefit higher-income tipped workers, mostly because those who make less than the standard deduction already owe no federal income tax.
The top 20% of tipped workers would receive an average tax cut of $5,768, while the bottom 20% would only receive only $74 on average, according to the Economic Policy Institute.
Additionally, opponents say the proposed law would introduce financial inequalities among employees making the same amount of money. "Two workers earning the same annual income could face vastly different tax burdens simply because of the nature of their livelihoods," wrote the Tax Foundation's Abir Mandal in April.
Instead, critics including the Economic Policy Institute, advocate for increasing the federal minimum wage as a better way to help all low-wage workers.
"Increasing the minimum wage would deliver dramatically larger raises for millions more workers without letting employers off the hook," write EPI's Nina Mast and David Cooper.
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