This week, Reps. Thomas Massie (R-Ky.) and Matt Gaetz (R-Fla.) introduced a bill intended to amend the Internal Revenue Code of 1986, aiming to exempt tips from income and employment taxes. This legislative proposal, named the “Tax Free Tips Act of 2024,” is intended to reduce the tax burden on individuals who rely heavily on gratuities as a significant part of their income.
Gaetz highlighted the importance of the legislation by pointing out that the cost of living continues to increase, putting financial pressure on many service industry workers. He stressed that these hardworking individuals, often holding down second jobs to cover their expenses, should be able to keep every dollar they earn in tips without the burden of federal taxes.
Massie noted that their proposal aligns with the views of fellow conservatives, former Rep. Ron Paul and former President Donald Trump, stating that both “have it right” on the issue.
During a recent campaign rally, former President Trump stated that if he were to be re-elected, one of his initial actions would be to eliminate the tax on tips. Ron Paul has long been an advocate for this measure.
“Taxing tips is regressive and goes against American tradition,” Massie said. With the emergence of digital payments, the government is now able to levy taxes on every transaction, including those that were historically exempt. Given the current inflation surge, it is rational to abolish the tax on tips to provide relief to workers.
The “Tax Free Tips Act of 2024” proposes several key changes to exclude tips from various forms of federal taxation. The bill suggests amending Section 102 of the Internal Revenue Code to classify tips as property transferred by gift, thereby exempting them from income taxes.
Additionally, it seeks to exclude tips from Social Security and Tier 1 Railroad Retirement taxes by amending Sections 3102, 3121, and 3202, which currently include tips in taxable income calculations for employees and employers. The legislation also aims to amend Section 3306, ensuring tips are not considered wages for unemployment compensation taxes. To align with these changes, the bill proposes amendments to Sections 3401 and 3402, excluding tips from wage withholding requirements.
It introduces a new paragraph to Section 7701, defining tips as any gratuity given to a salaried employee by a customer or client, ensuring clarity and consistency in tax treatment. Several conforming amendments to various sections of the tax code are included. For example, the repeal of Section 45B, which currently provides a credit for a portion of employer Social Security taxes paid on employee cash tips.
The bill’s introduction follows a week after former President Trump’s announcement at a campaign rally in Las Vegas. “For those hotel workers and people who get tips, you’re going to be very happy because when I get to office, we are going to not charge taxes on tips, people making tips,” Trump said.
Trump’s proposal aims to gain support from blue-collar workers—a demographic that has increasingly supported the Republican Party over the past decade.
Marjorie Taylor Greene also supports the measure. A post on X showed a receipt that included a tip of $120.00 with the words “Vote Trump! No tax on tips!!” She asked followers to put the same message on every receipt they sign.
The Committee for a Responsible Federal Budget (CRFB) stated in its analysis that the proposal could increase the national deficit by $150 billion to $250 billion. The deficit could potentially rise even higher if there is a shift in overall compensation from wages to tips.
In contrast, the current administration has proposed different tax policies. In March, President Joe Biden suggested a wealth tax on individuals worth more than $100 million and recommended increasing the corporate tax rate to its pre-Trump levels.
As Americans increasingly encounter tipping requests in various aspects of daily life, from restaurants to ride-sharing services, exempting tips from income taxes gains relevance. The debate extends beyond economic considerations to encompass societal attitudes towards tipping and fairness in taxation. Advocates argue that exempting tips could alleviate financial pressures on service industry workers, while opponents may question the equity of treating tip income differently from other earnings. There is also a growing discourse about the feasibility of eliminating tips altogether by ensuring better wages for workers.
Do you agree that the hospitality industry should be tax-free? Take a quick poll.
