What We Need To Know About Tips

Donald Trump and Kamala Harris have a “no tax on tips” proposal.

So let’s enter tip territory.

Taxing Tips

1.  A “Tipped Employee”

The federal government tells us that a “tipped employee” is someone who receives more than $30 a month in tips (unless otherwise indicated by a state.).

2.  The National Tipping Wage

The federal Fair Labor Standards Act requires a $7.25 minimum when tips and the minimum wage are combined. As a result, workers can earn $2.13 for an hourly cash wage as long as they also receive $5.12 in tips (called the tip credit). However, if they do not, the boss is supposed to pay you the difference.

3. States Vary

Because state minimum wages vary, so too can tip credits. Pew tells us that in 2023, “a restaurant server in Waukegan, Illinois, is entitled to a $13 minimum wage – $7.80 in direct wages from the restaurant, plus a $5.20 tip credit. But for a server 17 miles away in Kenosha, Wisconsin, the minimum is $7.25 – with $2.33 in direct wages from the restaurant, plus a $4.92 tip credit.”

This Pew graphic summarizes the differences: 4. Low Wage Employment

When we think of tips, waiters, bartenders, Uber can come to mind. According to Yale’s Budget Lab, in 2023, we would be looking at approximately four million workers–2 1/2% of all employment.

Minimum pay takes us to low wage employment (below $25 an hour in 2023) where tipped occupations represent close to four or five percent:

5. Taxes

Many tipped occupations pay too little to be taxed:

6. The Tipping Wage Floor

As economists, we can perceive the federal tipping rules as a floor. Consequently, they prohibit states from paying less. Theoretically, but not always, floors can create surpluses:

Our Bottom Line: The British Coastline

So, where are we?

Always, with posts like today’s I like to return to the coast of Great Britain, Explained by a classic paper from mathematician Benoit Mandelbrot, the shorter the ruler, the longer and longer (and longer) the coast. Or, thinking of eliminating tip taxes, the closer you look, the more you see:

My sources and more: With the candidates’ taxing tips proposals here and here, as a start, there is lots more territory to cover.  From there, we learned more about tipped workers from Yale’s Budget Lab. And finally, as always, Pew Research had the facts.

Please note that we quoted most of today’s “Bottom Line” and several other paragraphs from past econlife posts.