A new federal tax deduction for tipped workers, a campaign promise from former President Donald Trump, has become part of the U.S. tax code. However, experts across various political viewpoints suggest its benefits for California workers will likely be limited due to differing income levels and tax situations.
The Treasury Department and the IRS recently released details for the proposed regulations concerning this new tax provision. This deduction was included in a Republican-backed spending bill.
Key Takeaways
- New federal tax deduction allows up to $25,000 in tips to be deducted from federal income taxes for qualifying workers.
- Eligibility requires taxpayers to earn less than $150,000 (single filers) or $300,000 (joint filers).
- Experts believe the deduction will offer limited benefits for many California workers due to varying income levels and potential tax complexities.
- Concerns exist regarding fairness, increased tax complexity, and potential employer responses.
Understanding the New Tip Deduction
Under the new provision, taxpayers meeting specific income criteria can deduct a portion of their tips from federal income taxes. This applies to individuals earning less than $150,000 annually, or couples filing jointly with an income below $300,000. The maximum deduction allowed is $25,000 in tips.
This deduction is available regardless of whether taxpayers itemize their deductions. It is effective for the current tax year and will remain in place through 2028. The public has until October 22 to submit comments to the IRS regarding these proposed regulations.
Qualifying Occupations
The new deduction applies to nearly 70 different occupations. These include:
- Restaurant servers
- Gig workers (e.g., ride-hailing and food delivery drivers)
- Barbers
- Cosmetologists
- Golf caddies
Expert Perspectives on Limited Benefits
Many workers and tax experts interviewed by CalMatters raised more questions than answers about the real-world impact of the tip deduction. The actual income tax outcomes can vary significantly based on individual circumstances.
Factors such as marital status (single, married filing separately, or married filing jointly) and the presence of dependents play a crucial role. Additionally, whether workers deduct mileage or other business expenses can change their overall tax liability.
"I would be hard-pressed to think of a stupider tax policy that's become law," said Brian Galle, a law professor at UC Berkeley who specializes in taxation. Galle noted that the provision adds further complexity to the existing tax system.
Fairness and Potential Employer Actions
Experts also highlighted concerns about fairness. Some low-wage service workers will receive tax deductions that workers with comparable wages in other industries will not. This creates an uneven playing field in the tax system.
Galle also suggested that the provision could incentivize some employers to reduce workers' base pay. This reduction could potentially offset the full amount of the tax savings workers might receive from the deduction. This raises questions about who truly benefits from the policy.
Consumer Tipping Fatigue
Recent polls indicate a growing dissatisfaction among consumers regarding tipping practices. Experts like Galle suggest that if consumers believe all tipped workers can now deduct their tips, they might be less inclined to tip. This could negatively impact the overall earnings of service workers, potentially nullifying any tax benefit.
Broader Economic Context and Worker Concerns
The new tip deduction is part of a larger Republican spending bill. Some critics argue that the deduction is a minor benefit compared to other aspects of the bill, which they believe disproportionately favor high-income individuals.
Kayla Kitson, a senior policy fellow at the California Budget & Policy Center, a left-leaning think tank, expressed skepticism. She stated, "It’s a bit of a distraction from the overall bill and how disproportionately it’s helping rich folks at the expense of low-income folks." Kitson added that many low-income tipped workers might face harm from cuts to healthcare and food assistance, as well as the failure to extend enhanced premium tax credits, within the same bill.
Worker Experiences and Uncertainties
Dell Randle, a self-employed barber in Fairfield, a Bay Area suburb, believes he could potentially benefit from the deduction. However, he faces significant uncertainty regarding his tip income. "It’s kind of hard, because everybody doesn’t tip," Randle explained. "It’s hit or miss, there’s no consistency. I might go a whole week without someone giving me a tip."
Randle also noted that business has been slow since the pandemic began five years ago. The market has become oversaturated with new barbers. State data supports this, showing that barber licenses issued this fiscal year totaled 42,958, a 33% increase from fiscal year 2019-20. Randle concluded, "The benefit of this (deduction) will depend on how good business is. Business is slow, so I can’t count on something that’s not there."
This sentiment aligns with a Yale Budget Lab analysis. This analysis found that more than a third of tipped workers may not benefit from not taxing tips because they do not earn enough to owe income tax in the first place.
A Server's Perspective
Crissie Brown, a server at two restaurants in Alameda, earns between $95,000 and $100,000 annually. She plans to consult a tax preparer to understand if she can benefit from the new deduction. Brown remains skeptical, believing the Trump administration is not genuinely focused on the working class. "With the economy, I still live pretty poorly," Brown stated. "I can’t even afford to pay what I owe (in taxes) now." She fears that keeping tips tax-free "sounds good, but I have a feeling it will bite us" in the long run.
Specifics of the Deduction and Tip Income
It is important to note that only tips given voluntarily by customers will qualify for the deduction. This means that service charges automatically applied to diners' checks by some restaurants will not be deductible for servers.
Tip Reliance in California Food Service
The reliance on tips varies significantly among California food service workers, according to September data from payment-processing company Square, which analyzed payroll data from over 100,000 employees:
- Bartenders: 27% of income from tips.
- Full-service restaurant workers: 17% of income from tips.
- Cafe workers: 17% of income from tips.
- Quick-service restaurant workers (no table service): 11% of income from tips.
Former President Trump reportedly got the idea for the no-tax-on-tips policy from a Nevada restaurant server. This server had complained about the taxes she paid on her tips. The union representing Las Vegas food and hospitality workers generally supports the new deduction, despite some minor concerns about its specific details.
Impact on Gig Workers
Gig workers, a growing segment of the workforce, might experience uneven benefits from the new deduction. Sergio Avedian, a ride-hailing driver in Los Angeles and a contributor to the gig-work blog Rideshare Guy, commented on the potential impact. "For drivers, who often rely on tips to offset low base pay, this could feel like an immediate raise," Avedian said.
However, Avedian believes the deduction may not significantly benefit ride-hailing drivers, as he estimates only 15% to 20% of Uber and Lyft riders provide tips. In contrast, the deduction could be more beneficial for food-delivery drivers, such as those working for DoorDash. It would likely not help Amazon Flex workers, who typically do not receive tips.
Gig Worker Income from Tips (2024 Data from Gridwise Analytics)
- Food-delivery drivers: Over 53% of income from tips.
- Ride-hailing drivers: About 10% of income from tips.
- Couriers (package delivery): Less than 4% of income from tips.
Avedian also pointed out that gig workers are responsible for paying self-employment tax. This could significantly reduce any perceived benefit from the new tip deduction, assuming they qualify for it based on their income.
Almost 40% of taxi and ride-hailing drivers nationwide rely on Medicaid or receive health care subsidies, according to the Center for American Progress, a left-leaning think tank. In California, these drivers could be among the more than 1 million people projected to lose Medi-Cal coverage due to new work-hour requirements included in the Republican spending bill. This highlights the complex interplay of various policy changes on low-income workers.
Additional Concerns: Fairness and Complexity
Analyses from both the Cato Institute, a libertarian think tank, and the American Action Forum, a right-leaning think tank, indicate that the uneven effects of the deduction will extend to other industries. Both organizations criticized the "no tax on tips" proposal during the 2024 presidential election, when both Trump and former Vice President Kamala Harris suggested it. They argued it had "no other redeeming quality" and would only benefit a select group of low-wage workers.
Andrew Gradman, a tax lawyer in Los Angeles County, pointed out another fairness issue: a "marriage penalty." He explained, "If two tipped workers are married, they can only claim $25,000, while a single person would get to claim $25,000." This means married couples who both earn tips might not see the same proportional benefit as single filers.
Gradman also warned that the new deduction further complicates tax law. This increased complexity could lead to some workers inadvertently committing tax fraud or being wrongly accused of it. For those employed by larger institutions, accountants might handle the complexities. However, for independent contractors or gig workers receiving payments from platforms like Patreon, the burden of understanding and correctly applying the deduction could be substantial.
