Rebecca Morrow (Wake Forest), Tax on Tips, 44 Yale L. & Pol’y Rev. 1 (2025):
Carol, a 38-year-old single parent to an 18-year-old child, 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 coworkers. Recently, Democrats and Republicans promised to adopt a “no tax on tips” policy, exempting tips from the federal income tax. On July 4, 2025, President Trump enacted the first-ever tips-received deduction, which is effective through 2028.
Unfortunately, the tips-received deduction will not help Carol and threatens to increase her reliance on tip income. Since her $15,080 annual earnings are lower than her standard deduction, Carol does not owe federal income taxes. Thus, for Carol—and the 37% of restaurant employees who are not paid enough to owe federal income taxes—the tips-received deduction produces no tax savings. Proposals that would exclude tips from income would be even worse, threatening Carol’s Earned Income Tax Credits and future Social Security benefits, which 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 30 years, Social Security will 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 to help lower-wage tipped workers like Carol.
It proposes revising 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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