Trump’s no-tax-on-tips plan sounds good—until you read the fine print

In June 2024, former President Donald Trump made a direct appeal to America’s service workers: under his future administration, tipped income would no longer be subject to federal income tax. Framed as a pro-worker, anti-bureaucracy move, the promise quickly gained traction in food service communities and conservative media. The simplicity of the pitch—“no tax on tips”—masked a host of unresolved questions.

No official legislation or policy framework accompanied the pledge. As of mid-2025, the proposal remains a campaign promise, not a draft bill or IRS policy update. Yet it has already shaped expectations—and sparked debate about labor fairness, tax compliance, and budget priorities.

Under current US tax law, tips are considered taxable income just like hourly wages. The Internal Revenue Code requires workers to report all tips over $20 per month, and employers must withhold federal income tax, Social Security, and Medicare based on that amount. In many cases, especially at chain restaurants and hotels, digital tipping systems automatically log and report those earnings.

In cash-heavy environments, however, reporting compliance is lower. The IRS estimates that up to 40% of tip income goes unreported—meaning that, even today, the tax burden varies sharply depending on how and where a worker earns their tips. The current system ties tip income not just to tax obligations but also to benefit eligibility. Social Security, Medicare, and unemployment insurance are calculated based on reported earnings. Skipping tip reporting might avoid taxes—but it also risks cutting into future support.

At first glance, a tax exemption on tips appears to support low-income workers. After all, tipped occupations—waitstaff, bartenders, valets, hairdressers—often fall below the median income line. But in practice, the exemption skews toward workers who report high levels of tip income and are already above the federal minimum wage floor.

Consider a bartender in Las Vegas or a high-end server in New York City earning $80,000 a year in tips. Eliminating income tax on that amount could create significant savings—potentially $10,000 or more annually. Compare that with a café worker in Kansas making $8,000 a year in tips: the income tax on that amount is already minimal after deductions and credits.

In other words, the dollar value of this policy scales with earnings—but the tip system is already unequal. High earners would save most. Low earners would gain little—and could even lose future benefits if they underreport income.

If tips are to be tax-exempt, the next question is definitional. What qualifies?

• Are tips added via card machines treated the same as cash left on the table?
• Do pooled tips among a team of service workers count individually?
• How should platforms like Uber, DoorDash, or Airbnb classify service-related gratuities?

The IRS would need to establish clear definitions—and ensure consistency across reporting systems. For employers, this introduces payroll complexity. For gig platforms, it raises classification risks. Further, exempting tips from income tax does not automatically remove the obligation to pay payroll taxes—namely, Social Security and Medicare contributions. Unless explicitly included, workers and employers may still owe up to 15.3% of tip income for these programs.

This matters because if tips are no longer reported accurately—or at all—then future entitlement amounts (like retirement or disability payouts) could shrink. In the name of take-home pay today, workers may be eroding protection for tomorrow.

This is where the policy becomes structurally risky. Social Security is funded through a payroll tax levied on reported earnings. If tipped income goes unreported—or becomes legally exempt—then total contributions into the system could decline.

According to the Social Security Administration, around 5% of all payroll taxes currently come from hospitality and service sectors. While this may seem modest, in a system already projected to face insolvency by 2033, any drop in contributions accelerates the pressure. And for workers themselves, the risk is personal. Social Security payouts are based on reported earnings over 35 years. If tip income is not taxed—and not recorded—then a worker’s official earnings history may appear much lower, leading to reduced retirement or disability benefits.

Tipped income has always posed a challenge for tax authorities. In 1965, tips were added to taxable income because they represented a significant—though often invisible—share of compensation for millions of workers.

Since then, the IRS has built multiple programs to encourage tip reporting, such as the Tip Rate Determination Agreement (TRDA) and Tip Reporting Alternative Commitment (TRAC). These programs use sales data and tip averages to estimate tip income, reducing audit risk for employers in exchange for voluntary compliance.

Removing tips from taxation undermines these compliance frameworks. It also contradicts decades of IRS efforts to standardize reporting and ensure equity between tipped and non-tipped workers.

Few, if any, advanced economies exempt tipped income from taxation. In Canada, Australia, the UK, and most EU countries, tips are considered taxable earnings. The rationale is simple: they are compensation for labor, not gifts.

Some countries take a different approach: instead of exempting tips, they raise base pay for service workers and treat tips as supplemental. Others, like Japan, discourage tipping altogether in favor of service-inclusive pricing. In this context, Trump’s promise is an international anomaly. It does not align with global tax norms or labor protections. And it may signal to other countries a weakening of US tax enforcement posture—especially as global minimum tax frameworks evolve.

According to estimates from the Tax Policy Center and Committee for a Responsible Federal Budget, a full income tax exemption on tipped income could cost the federal government $150–250 billion over 10 years, depending on compliance levels and enforcement design.

This comes at a time when the US is running record-high peacetime deficits, with over $1 trillion in annual interest payments. Forgoing this revenue without offsetting tax increases or spending cuts would widen the deficit further. And since the tax break is narrowly targeted—just one category of worker—it raises equity concerns. Why should tipped workers receive exemptions that construction, retail, or home health aides do not?

Supporters of the proposal argue that it reduces burden on low-wage workers and encourages transparency. But most low-income workers already pay very little federal income tax due to the standard deduction and the Earned Income Tax Credit (EITC). For them, exempting tips may offer minimal marginal gain—especially if they must still file taxes, calculate eligibility for benefits, and track other income.

More concerning is the behavioral shift: exempting tips may lead to more underreporting, less transparency, and further off-the-books practices. It could also incentivize employers to push more compensation into tips to avoid payroll costs—deepening wage instability for workers. And at a macro level, it sets a precedent: labor income that escapes taxation simply because it’s popular. That erodes the uniformity and neutrality of the tax code—two principles long regarded as pillars of credible public finance.

Perhaps the most telling feature of the “no tax on tips” promise is what it omits. No draft legislation. No fiscal modeling. No administrative plan.

• Will the IRS be tasked with tracking “optional” tip reporting?
• Will digital payment processors be exempt from 1099-K requirements?
• Will tip income still count toward Affordable Care Act subsidy thresholds?

Each of these questions opens a logistical wormhole. And without clear answers, workers may find themselves facing new confusion, not fewer burdens.

To understand an alternate path, consider Singapore’s GST Voucher Scheme and Workfare Income Supplement (WIS). These are targeted transfers to low-income workers, designed to offset indirect taxes (like GST) and reward work without distorting wage structures.

Unlike the US tip exemption model, Singapore’s approach:

• Is administered through centralized records (CPF, IRAS)
• Ensures future retirement and health contributions are preserved
• Is means-tested to target those most in need

It offers a lesson: there are ways to support low-wage workers that don’t sacrifice tax integrity or future entitlements.

The “no tax on tips” policy may never pass. But as a rhetorical device, it reshapes expectations. It implies that some labor income should be free of tax scrutiny—based on job type, not income level. That sets a precedent with consequences. It may weaken support for existing compliance programs. It may blur the line between earned income and informal payments. And it may normalize symbolic policies that promise relief but deliver confusion.

In the long run, workers deserve real wage stability, access to benefits, and clear tax rules—not exemption experiments that risk future support for short-term applause.