Reps. Thomas Massie (R-Ky.) and Matt Gaetz (R-Fla.) introduced a bill on June 18 that aims to amend the Internal Revenue Code of 1986 to make tips exempt from income and employment taxes.
This legislative proposal, titled the “Tax Free Tips Act of 2024,” is designed to alleviate the tax burden on individuals who rely on gratuities as a significant portion of their income.
“As the cost of living continues to rise, the hardworking men and women in the service industry, many of whom may be working a second job to make ends meet, must be allowed to keep every dollar of tip money they earn,” Mr. Gaetz said in a statement after filing the legislation.
Mr. Massie indicated the lawmakers were taking direction from fellow conservatives former Rep. Ron Paul and former President Donald Trump, as they both “have it right” on the issue.
Former President Trump said at a campaign rally earlier this month that one of his first acts should he win re-election would be to cut the tax on tips, while Mr. Paul has advocated for the measure for decades.
The Legislation
The “Tax Free Tips Act of 2024” includes several key provisions aimed at excluding tips from various forms of federal taxation.
The bill proposes an amendment to Section 102 of the Internal Revenue Code, classifying tips as property transferred by gift, thus exempting them from income taxes.
Additionally, the legislation seeks to exclude tips from Social Security and Tier 1 Railroad Retirement taxes by amending Sections 3102, 3121, and 3202, removing specific subsections that currently include tips in taxable income calculations for both employees and employers.
The bill further aims to amend Section 3306 to ensure that tips are not considered wages for the purpose of unemployment compensation taxes.
To align with these changes, the bill proposes amendments to Sections 3401 and 3402, aiming to exclude tips from wage withholding requirements.
It also adds a new paragraph to Section 7701, defining tips as any gratuity provided to a salaried employee by a customer or client, ensuring clarity and consistency in tax treatment.
Perspective and Outlook
The bill was introduced a week after former President Trump’s announcement at a campaign rally in Las Vegas.“For those hotel workers and people who get tips, you’re going to be very happy because when I get to office, we are going to not charge taxes on tips, people making tips,” former President Trump said.
Former President Trump’s proposal aims to garner support from blue-collar workers—a demographic that has shown increasing support for the Republican Party over the past decade.
The current administration has taken a contrasting approach to tax policy. In March, President Joe Biden proposed a wealth tax on individuals worth more than $100 million and suggested increasing the corporate tax rate to its pre-Trump levels.
Additionally, President Biden has advocated for raising the federal minimum wage to $15 an hour and phasing out the tipped minimum wage in restaurants.
The “Tax Free Tips Act of 2024” would represent a significant shift in the treatment of gratuities within the federal tax system.
Under existing law, tips are treated as ordinary income, subject to income and employment taxes. This proposed legislation would relieve workers in service industries—such as hospitality, restaurants, and personal services—from the tax burdens associated with their tipped income.
Any change to the tax code requires an act of Congress. As the 2024 elections approach, the fate of this bill—and individual tax rates more broadly—will likely hinge on the post-election political landscape.
