The IRS is a little bit like a four-year-old when it comes to pointing out their latest accomplishments.
So they made sure we all know how well they’re doing with a news release on Friday about recovering 1.3B from the Inflation Reduction Act (cue taxpayer applause). Now, let’s see what they do with those funds, eh?
Still, it’s a common sentiment that, with all these advancements, they still haven’t figured out a simpler way for Colorado Springs wait staff to report their tips. But it looks like Harris and Trump have an idea for that: eliminate taxes on tips altogether.
There’s been a lot of talk around that proposal, and even some Congressional legislation on the topic. That’s something I want to delve into today.
But before I do, let me just drop a reminder here about the tax extension deadline. It’s coming up on October 15. That’s about a month away so think about getting your tax information and records to my office ASAP.
And while we’re on reminders, let me also say, if you’re a waiter or a bartender or any other kind of tipped worker, you’ll need to report your tips from last month to your employer by the 10th.
But if that deadline goes away after the next election—which seems like a possibility since both presidential candidates are proposing no taxes on tips—it’s a good idea to know what that means for you. Let’s examine that.
Does No Taxes on Tips Help or Hurt Colorado Springs Workers?
“A promise made is a debt unpaid.” – Robert W. Service
In a surprising moment, both 2024 presidential nominees are proposing eliminating taxes on tips. No one could fathom that these particular candidates could agree on something, yet here we are.
And because roughly 4 million workers in the U.S. rely on tips as part of their income, it’s garnered some attention.
The idea is simple: stop taxing tips to give a break to workers at the lower end of the income scale. But is it really that straightforward? Let’s break down what this could mean if you’re a server, bartender, or other kind of tipped worker who depends on gratuities to make ends meet.
The current tax landscape with tips:
Yes, tips are taxable income. This means that if you’re a worker who receives more than 20 dollars in tips in a given month, you must report that amount to your employer.
They then withhold the necessary taxes on tips—including income, Social Security, and Medicare taxes. These rules apply to both cash tips and tips made via credit cards or online payments. In some states, you may also be subject to state income taxes on your tips.
Other political proposals:
Then, apart from campaign promises, there are also two proposals currently in Congress which aim to change the way tips are taxed. First, there’s the Senate’s No Tax on Tips Act which would allow workers to claim a 100 percent deduction at filing for their tipped wages.
The Tax-Free Tips Act of 2024 in the House takes a different approach, aiming to eliminate taxes on tips altogether by classifying tips as “gifts.” This proposal would also remove the requirement to pay Social Security and Medicare taxes on tips.
The pros of eliminating taxes on tips:
There are some clear advantages for tipped workers, particularly those who struggle with inconsistent earnings. Tips are an unstable source of income, and reducing tax burdens on them could make life a little easier.
- Increased take-home pay. This could significantly improve your financial well-being if you’re in a lower-wage job and rely heavily on tips to supplement your income.
- Easier tax filing. It removes the burden for you of accurately tracking and reporting tip earnings, which can sometimes be inconsistent or difficult to calculate.
- Boost to the service industry. Job satisfaction and retention rates in the service industry could improve.
- Motivation. When you feel more fairly compensated (aka, not owing taxes on tips) for your efforts, you feel more inclined to put in quality work.
The drawbacks:
The reality is that many of the lower-income workers who depend on tips actually don’t make enough money to meet the income tax threshold. Therefore, this wouldn’t have as much effect on them.
Plus, the loss of these contributions could have a long-term effect on their financial stability. Basically, if tips are no longer subject to Social Security and Medicare taxes, then workers won’t record contributions that will be helpful for the future. They may lose out on Social Security payouts and unemployment insurance.
The other big drawback: There will be temptation by bad actors to restructure pay and compensation to take advantage of the no-tax legislation.
For now, the law remains unchanged, and tips are still taxable. It’s essential to stay on top of your tip reporting (due to your North Colorado Springs employer by the 10th of the following month you receive those tips) to avoid any issues with the IRS. Keep a daily log of your tips, save receipts, and report your earnings accurately to your employer.
If you have any questions about how your tips affect your taxes or financial situation, feel free to reach out—we’re here to help:
719-260-0320
Helping you stay tax savvy,
Susan Wilklow