Heading into election season, and already with animated campaigns underway, business owners and wage employees alike will cast votes in their own financial favor. For the restaurant industry, one of the leading campaign cries is the Republican Party’s promise for “no taxes on tips.” The act, introduced by Sen. Ted Cruz (R-Texas), alongside Steve Daines (R-Mont.), Rick Scott (R-Fla.), and Kevin Cramer (R-N.D.), proposes to make cash tips exempt from taxation, beginning in 2025.
In the United States, the restaurant industry is “one of the largest tipped industries,” reports Nation’s Restaurant News (NRN). The policy would have a significant financial impact on the take-home earnings for restaurant workers as, “according to the Center for Economic Policy Institute, ‘customer tips account for 71% of a tipped worker’s minimum wage, while the direct cash subminimum wage represents just 29%.’” The legislation will require employees to still pay their payroll taxes, and cash tips could still be subject to taxation at the state level.
This legislative concept addresses the shaky state of labor-employee relations, ongoing since the pandemic. Restaurant owners and managers struggled to keep fully-staffed restaurants and maintain employee morale in an increasingly expensive economy. Eliminating taxes on cash tips was meant to improve worker morale and facilitate more earning-power for restaurant employees.
However, critics believe such an act will do the opposite. “One of the concerns the business association originally had is that if tips are not taxed, then they won’t show up as income, which would impact restaurant workers’ in more than just their paychecks,” writes NRN. This could include a negative impact on credit and an ability to take out loans or open credit cards because of a smaller reported income.
It will also negatively affect contributions to social security, and the “National Restaurant Association pushed the legislators to make sure the bill stipulates that the employer and the employee pay into that employee’s FICA — Social Security trust fund payments,” in response to this concern NRN says.
But still lawmakers critical of the idea worry that tipped restaurant workers don’t make enough to pay federal taxes without tips. NRN states, “According to the Bureau of Labor Statistics, as of 2020, 1.5% of all workers are paid at or below the federal minimum wage, and 5.5 million of those workers are paid a subminimum wage or under the tip credit system. Generally, workers must make at least $13,850 or $27,700 per household in order to meet the income tax filing requirement.”
In light of the recent labor crisis, however, lawmakers and industry officials in support of the bill say the pros outweigh the cons. “Access to employees remains one of our highest priorities for the restaurant industry, so this could go a long way in bringing more people into the industry,” says Sean Kennedy, executive vice president of public affairs for the National Restaurant Association.
“Political pundits will continue to debate this issue and potentially the ‘no taxes on cash tips’ may continue to be a debated topic at the federal level through this election cycle,” writes Richard Weil, principal and owner of National Restaurant Consultants. “No matter the politics, it is National Restaurant Consultants’ (NRC) belief that attracting and retaining quality staff is a key component for the health of the industry. Adjusting the taxes on cash tips may lead to other compensation and taxation conversations, but at NRC we believe this action to be positive overall for the industry.”
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