‘No tax on tips’ is now law. What does that mean for tipped workers?

President Trump began touting his plan to end taxes on tips on the campaign trail in Nevada, a swing state where there are tens of thousands of tip earners working in and around the Las Vegas strip.

Fast-forward a year, and the catchphrase “no tax on tips” has become a key highlight of the president’s signature tax and spending law. Many workers who have historically received tips will be able to deduct up to $25,000 in tips from their taxable income through 2028. The deduction begins phasing out at incomes above $150,000, and workers will still have to pay federal taxes on tips beyond the $25,000 cap.

But labor advocates say Trump’s big promise has morphed into a more complicated policy reality, and lower-income workers may be left out.

Other tipped workers, meanwhile, may be left frustrated by the deduction cap, the policy’s limited time frame, and the disparities it may create between front-of-house and back-of-house restaurant staff. Workers have also expressed confusion online about whether they will see an immediate difference in their pay or will have to wait until next year’s tax season to benefit.

In Nevada, the Culinary Union — which includes 60,000 workers in casinos, restaurants, bars, and more in Las Vegas and Reno — has spoken out in favor of tax relief for tipped workers. But a statement from Culinary Union Secretary-Treasurer Ted Pappageorge described the bill’s effects for the working-class as temporary, “while windfall tax cuts for billionaires and the rich are permanent.”

Elyanna Calle, the Austin-based president of Restaurant Workers United, also told Yahoo Finance that service industry workers would be better served by making a livable wage, adding that many back-of-house workers — line cooks and dishwashers, for example — will not be helped by the “no tax on tips” policy.

For tipped workers, “‘No taxes on tips’ just creates a larger reliance on tips, instead of solving the issue of base wages — wages that workers can rely on, and budget on, and count on,” Calle said.

Some labor advocacy organizations have also pointed out that cuts to Medicaid and food assistance are likely to hit the same working-class people meant to benefit from the “no tax on tips” policy, chipping away at potential gains. One Fair Wage said in a May report that an estimated 45% of the 2.75 million restaurant and tipped workers who rely on Medicaid could lose coverage.

A brief history lesson

Tipped income has been subject to taxation for over a century, said Lawrence Zelenak, a tax law professor at Duke Law School.

But until the early 1980s, “enforcement was extremely bad” and the compliance rate was incredibly low — about 16% in 1981, Zelenak said. Though Congress sought stricter tax requirements in 1982, the solution was that larger restaurants were required to allocate and report tips equal to at least 8% of sales among tipped workers. The compliance rate effectively rose to about 50% as a result, according to Zelenak.

Still, tips received in cash were difficult to track, and many tips were left untaxed. That changed as more customers began to tip with credit cards, which gave the IRS more information and improved compliance even more, taxing a greater share of tips.

As for why Republicans sought a deduction in the tax bill and not totally removing taxes on tips, “that’s complicated,” Zelenak said.

To enact no taxes on tips, lawmakers could have written a provision that excluded tips from gross income, Zelenak said. “Instead, you still have to report tips as part of your gross income, but then you can claim a deduction for tips received.”

The deduction helps “only if you have some taxable income to offset,” Zelenak said. “If your income is low enough that it would all be sheltered by the standard deduction anyway — which would be true of tipped workers at or near the minimum wage — then this doesn’t do you any good.”

What should workers do now?

Right now, the major question for tipped workers may be whether this will impact their paychecks immediately.

“There are not going to be immediate withholding adjustments on waiters and waitresses, or those receiving tips,” said Steven Elliott, a tax director at Mercer Advisors, a registered investment advisor and full-service wealth manager. “It may come into play later in the year, maybe fourth quarter, but this is going to be mostly a positive adjustment for folks when they file their returns after receiving their W-2s.”

Learn more: What is a W-2 form? 

“They’ll get a nice surprise, those that qualify, to get a larger refund,” Elliott said.

However, tipped workers could also file an updated W-4 and lower their withholding for a quicker benefit.

Workers can get a faster refund through electronic filing and using direct deposit, Elliott added. In the near term, he recommended that tipped workers begin taking a closer look at their pay stubs to understand their elections and ensure they’re not surprised when they receive their W-2.

Emma Ockerman is a Senior Reporter for Yahoo Finance covering economic and labor issues in personal finance.

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