Some segments of the U.S. restaurant industry don’t support President Donald Trump’s proposal to eliminate federal taxes on tips, saying it would help too few people and obscure bigger issues in the way tipped workers are paid.
The Independent Restaurant Coalition, which represents nearly 100,000 restaurant and bars, has appealed to Congress to reconsider the proposal, which is part of the president’s spending bill. Even some workers who rely on tips say they oppose making them tax-deductible.
“I think there’s a huge hole in this concept of ‘no tax on tips’ because a lot of restaurant workers aren’t receiving tips in the first place,” said Elyanna Calle, a bartender in Austin, Texas, and president of the Restaurant Workers United union. “It’s not helping most kitchen workers, and oftentimes those are the people who are being paid the least.”
Tips included in sprawling tax cuts package
For now, making tips tax-free appears to have broad support among lawmakers. Both Trump and his Democratic rival in last year’s U.S. presidential election, former Vice President Kamala Harris, campaigned on the concept.
The House included it in a tax cuts package approved last month. The bill would eliminate federal income taxes on tips for people working in jobs that have traditionally received them as long as they make less than $160,000 in 2025.
The Senate Finance Committee passed a modified version on Monday. Senators capped deductions at $25,000 and want to phase them out for individuals whose income exceeds $150,000. Eligibility would be based on earnings as of Dec. 31, 2024.
Both the House and Senate committee measures would apply through the 2028 tax year. The Finance Committee specified that “cash tips” qualify but said the term applied to tips paid in cash, charged to credit cards or received from other employees under a tip-sharing arrangement.
Main industry trade group supports tax-free tips
Wary of wading into politics, many restaurant chains contacted by The Associated Press about tax-free tips didn’t respond or referred questions to the National Restaurant Association, including Waffle House, The Cheesecake Factory, First Watch and the parent companies of Olive Garden, Applebee’s and Chili’s.
The National Restaurant Association, a trade organization that represents nearly 500,000 U.S. restaurants and bars, applauded the House’s passage of Trump’s spending bill and said it wants to see tax-free tips. The association estimates the measure would benefit more than 2 million servers and bartenders.
But the U.S. restaurant industry has more than 12 million workers, including dishwashers and chefs, according to government data. The Independent Restaurant Coalition says the “no tax on tips” proposal leaves out too many of those workers.
A push to eliminate taxes on service charges
The coalition wants Congress to eliminate taxes on service charges, which are being used to compensate employees at an increasing number of restaurants. Around 15% of U.S. restaurants add some form of service charge to customers’ bills, according to the National Restaurant Association.
George Skandalos, a pizza restaurant owner in Moscow, Idaho, was tired of seeing servers count out hundreds of dollars of tips at the end of the night while people in the kitchen scrubbed the floor on their hands and knees. So he started experimenting with different compensation models.
Skandalos tried pooling servers’ tips and distributing them but ran into rules preventing that. He tried raising his menu prices and explaining that a percentage of each order was going to employee compensation, but customers didn’t understand and kept tipping.
Skandalos now has a gratuity-free policy at his restaurant, Maialina. He charges a 20% service fee that is distributed to all employees and helps pay for benefits like paid vacation and parental leave. The vast majority of customers appreciate the effort, he said.
Skandalos said “no tax on tips” doesn’t acknowledge restaurants like his that are trying to distribute pay more equally. He would like to see service charges exempted from taxes.
“This bill is a very good start in terms of trying to leave more money in people’s pocketbooks, but now let’s finish what we started and make it a great thing for the restaurant industry overall,” he said.
Tipped workers seek higher wages
But Ted Pappageorge, the secretary-treasurer of the Culinary Workers Union Local 226 in Las Vegas, said restaurants should just pay their kitchen workers more to compensate for servers earning tips.
“’No tax on tips’ is an opportunity for Republicans and Democrats to deliver something to working class folks,” he said.
Pappageorge wants Congress to take up a separate bill introduced by Nevada Democrat Steven Horsford that would eliminate taxes on tips but also require restaurants to pay workers at least the federal minimum wage of $7.25 per hour. In 43 states, restaurants are currently allowed to pay tipped workers as little as $2.13 per hour.
Yolanda Garcia, a barista at Resorts World in Las Vegas and a member of the Culinary Workers Union, also supports Horsford’s bill. Garcia said she makes $33,000 a year, including up to $600 per month in tips. Tips are never guaranteed, she said, but if they were tax-free, it would help make up for that uncertainty.
“It would help me get more groceries. Right now, the price of everything has gone up,” Garcia said.
Calle, the Austin bartender and union leader, said she also benefits from tips, but they’re inconsistent. She suspects tipping would decline if the tax-free provision passes, because customers will resent it.
For Calle, the underlying problem that must be solved is low base pay.
“I think that if we continue to make the shift into relying on tips for people, it gives incentives for companies to not raise wages,” she said.
