By Emily Goldberg, Editor-in-Chief
According to the National Employment Law Project, around 4.3 million individuals in the U.S. currently work as tipped employees – around 1.4% of the U.S. population – a majority of whom work in restaurants.
These tipped workers’ wages do not come from fixed salaries from employers, but rather from variable tips earned from customers according to their satisfaction. There are currently 2,237,850 waiters and waitresses employed throughout the U.S., restaurant service being just one example of many industries employing tipped workers.
According to the U.S. Department of Labor, a worker who is considered a tipped employee must earn more than $30 in tips over a month. For those employees, employers are only required to supplement the tip earnings with a $2.13 per hour minimum wage – $5.12 less than the federal minimum wage of $7.25 per hour.
However, this rule comes with one caveat. Employers must ensure that within each workweek, the amount their workers make in both fixed wages and tips (in addition to any overtime wages) adds up to the required minimum wage amount of $7.25 per hour worked. In other words, if a worker’s weekly wages and tips do not at least equal the federal minimum wage multiplied by the hours worked, the employer must pay that employee the difference.
Currently, all tips received by workers can be taxed by the federal government, unless the worker receives less than $20 in tips throughout the month. This tax applies to tips that come in the form of cash as well as electronic payments, noncash tips such as tickets to shows or other items of value, and tips received from one’s coworkers via a tip pool. The IRS requires employees to keep track of the value of tips they make each month (if they total over $20) and report the amount to both their employer and their income tax return.
Donald Trump was the first presidential candidate whose campaign vocalized ending the practice of taxing tips, which Kamala Harris made a part of her policy during the launch of her campaign. Harris proposed to expand on this by creating policies that work to raise both the federal minimum wage as well as the base minimum wage paid to tipped workers.
This approach could be seen as an attempt to win the swing state of Nevada, where service workers will have a large impact on determining the election outcome in the state, according to an article in The Hill. With this proposal, both candidates hope to appeal to workers striving to earn a higher salary in an age of inflation. However, many have noted that simply cutting taxes on tips is not a simple solution.
While this policy may focus on increasing the yearly earnings of lower-class American workers, it could have a detrimental effect on “the efforts” to increase the minimum wage, according to an article in PBS News. If workers earn more money in tips, federal lawmakers may have less incentive to pass laws to raise their base salary. This could affect non-tipped workers adversely by improving conditions for tipped workers while delaying a long-awaited minimum wage increase that would affect all low-wage earners.
According to The Hill, if tipped employees earn more money in tips, employers could also be less inclined to pay them higher base wages. While ending the tax on tips could significantly increase the yearly salary of high-tip earners it will not have the same benefit for low-tip earners, who will not see as much of an increase in net yearly earnings given their lower monthly tip collections.
Currently, the U.S. government owes more than $35.69 trillion in federal debt. According to The Hill, cutting taxes on tips would also push the federal U.S. deficit past the $100 to $200 billion in additional debt already expected over the next 10 years without significant tax reductions.
Failing to end the tax on tips and raise the minimum wage paid to tipped workers may further ingrain the practice of tipping culture into American society, which many consumers find bothersome.
While there are both benefits and drawbacks to this unique system used to pay tipped workers, whether the American people are pleased with the new proposal to end taxes on tips suggested by both presidential candidates remains to be seen. Ultimately, the answer to that question will be proven by the polls.