Rebecca Morrow (Wake Forest; Google Scholar), Tax on Tips, 44 Yale L. & Pol’y Rev. ___ (2026):
Carol is 38 years old, a single parent to an 18-year-old child, and works full-time as a restaurant server. Her employer pays her $2.13 per hour, which is legal according to federal law and the laws of Indiana, Kansas, Kentucky, Louisiana, Mississippi, North Carolina, Texas, Utah, Virginia, and Wyoming. She also earns tips, which bring her wages up to $7.25 per hour. Her tips might have brought her wages above the $7.25 federal minimum wage, but when Carol makes more than $5.12 in hourly tips, her employer takes the excess and distributes it among Carol’s co-workers. Recently both Democrats and Republicans have pledged to help tipped workers by exempting tips from the federal income tax. President Trump promises to sign a “no tax on tips” proposal into law soon. The public supports this proposal, assuming it will help hard-working, low-paid servers like Carol.
Unfortunately, a “no tax on tips” proposal would hurt Carol. Since her $15,080 annual earnings are lower than her standard deduction, Carol does not owe federal income taxes. Thus, for Carol—and the thirty-seven percent of restaurant employees who are not paid enough to owe federal income taxes—exempting tips from tax produces no savings. Even worse, Carol’s current Earned Income Tax Credits and future Social Security benefits are calculated based on her earnings. In 2024, for example, her earnings of $15,080 made her eligible for an Earned Income Tax Credit of $4,213. If tips were excluded from her income, that credit would drop to $1,505. Assuming that Carol retires in thirty years, Social Security is projected to pay her $3,259 monthly if tips remain included in her wages but only $950 monthly if tips are excluded.
This Article rejects “no tax on tips” slogans and is the first to offer an alternative that would help low-paid tipped workers like Carol. It proposes to revise the multi-billion-dollar section 45B tax credit to encourage restaurant employers to directly pay all workers the $7.25 federal minimum wage and to allow workers to retain all their tips. Further, it seeks to use any money saved from revising the credit to fund expansion of the Earned Income Tax Credit, particularly for workers who do not have children or whose children are aging out of tax benefits.
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