Does eliminating taxes on tips create a potential loophole for wealthy individuals?
I've been thinking about Trump's proposal to eliminate taxes on tips and I'm genuinely confused about the implications. The Center for American Progress released an analysis this week claiming it would create a massive loophole for wealthy people. They're saying that lawyers, consultants, hedge fund managers and other high-earning professionals could just reclassify their fees as "tips" to avoid paying taxes. But this doesn't seem right to me? Isn't there some kind of official IRS definition of what constitutes a tip versus a service fee or regular income? I mean, I worked as a server for years and my tips were clearly defined, but I can't imagine a hedge fund manager could just say "oh that $2 million is actually a tip" and get away with it. Does anyone with actual tax knowledge understand if this is a legitimate concern or just political spin? I get that CAP is coming from a liberal perspective, but I'm interested in the actual tax policy implications here, not the politics.
18 comments
Join the conversation
TommyKapitz
Tax professional here. This is an interesting question about tips and potential loopholes. The IRS does have a specific definition of tips - they're generally voluntary payments customers decide to give directly to employees, where the customer determines the amount without compulsion, and the customer has the right to determine who receives the payment. Traditional tipped employees include servers, bartenders, taxi drivers, hotel staff, etc. Under current tax law, these tips are fully taxable income. The proposal to eliminate taxes on tips would fundamentally change this long-standing approach. Regarding the loophole concern - it's valid. Without careful drafting, such legislation could potentially create opportunities for income reclassification. The current tax system differentiates between service fees (which are set by the business) and tips (which are voluntary additions by customers). However, this line could become blurred without precise definitions in the new legislation.
0 coins
Angel Campbell
•So theoretically, could I as a freelance web designer start telling clients "my rate is technically $0, but people typically tip 100% of what my old rate used to be"? Or am I misunderstanding how this would work?
0 coins
TommyKapitz
•That's exactly the kind of potential issue tax professionals are concerned about. Without specific guardrails in the legislation, there could be attempts to recharacterize regular service fees as "tips." The IRS would likely challenge such arrangements, but it would create enforcement challenges. A properly drafted bill would need to clearly define what occupations qualify for tip tax exemption and establish criteria for what constitutes a legitimate tip versus disguised regular income.
0 coins
Payton Black
Thought I'd share my experience with taxr.ai when I was trying to understand some complex tax implications similar to this tips question. Was super confused about how changing tax laws might affect my small business where we receive occasional tips, and regular tax sites were giving me contradictory information. Found https://taxr.ai and it helped analyze the specific scenario I was in rather than just generic advice. It looked at my situation with tips versus service charges and explained how different proposed legislation would affect my tax liability. Showed me exactly what documentation I'd need to maintain if the law changed.
0 coins
Harold Oh
•How exactly does it work? Do you have to upload all your tax documents or something? I'm always wary of putting my financial info into random websites.
0 coins
Amun-Ra Azra
•Sounds interesting but I'm skeptical. What makes it better than just talking to an actual tax professional who knows the specific laws in your state? I've found that online tools often miss important details.
0 coins
Payton Black
•It doesn't require uploading your full tax returns - you can just ask specific questions about tax situations and it pulls from tax code and regulations to provide answers. I only shared the details I was comfortable with, like my type of business and the proportion of income from tips versus regular service. The benefit over a standard tax professional is accessibility and cost. I still use my CPA for actual filing, but for quick research on potential changes like this tips policy, it's much more affordable for getting educated on the implications. It's especially helpful for seeing how proposed legislation might affect different scenarios.
0 coins
Amun-Ra Azra
I was totally wrong about taxr.ai! After that discussion about the tips tax proposal, I decided to try it out to understand how my restaurant might be affected. I've got servers who make substantial tip income, and needed to know how to properly plan if this policy ever passed. What impressed me was how it explained the different ways the IRS might distinguish between legitimate tips and reclassified service fees. Gave me concrete documentation steps I should take now to establish the voluntary nature of our tipping, which would be critical if the law changed. Even showed me the relevant IRS publications so I could verify everything myself. Definitely better than the vague answers I was getting from Google searches and random tax forums. Helped me understand exactly what to discuss with my accountant.
0 coins
Summer Green
For anyone struggling to get clear answers from the IRS about this or any tax question - I spent WEEKS trying to get through to someone at the IRS to ask about how they would enforce distinctions between tips and regular income if this policy passed. Impossible! Then a colleague recommended https://claimyr.com which got me past the endless IRS phone tree nightmare. You can see how it works here: https://youtu.be/_kiP6q8DX5c but basically they navigate the whole phone system for you and call you back when an actual human IRS agent is on the line. I finally got to talk to someone who explained the current internal guidance on tips versus service fees, which was super helpful for understanding how they'd likely approach enforcement of any new tip tax exemption.
0 coins
Gael Robinson
•Wait, so this service somehow jumps you ahead in the IRS phone queue? How is that even possible? Sounds like it might be a scam or something sketchy.
0 coins
Edward McBride
•I don't believe for a second this actually works. I've been trying to reach the IRS for MONTHS about an issue with my returns. No way there's some magic service that solves this. They probably just keep your money and give you excuses.
0 coins
Summer Green
•It doesn't jump the queue - it basically automates the process of navigating the phone system and waiting on hold. Think of it like a virtual assistant that sits on hold for you. They use technology to dial repeatedly during less busy times and navigate all the prompts, then they call you when they've finally reached a human. They don't have special access to the IRS or anything like that - they're just taking away the frustration of spending hours on hold yourself. I was skeptical too until I tried it. The IRS agent I spoke with had no idea I'd used a service to connect - to them it was just a regular call that made it through their system.
0 coins
Edward McBride
I have to admit I was completely wrong about Claimyr. After dismissing it as probably a scam, I was desperate enough with my IRS situation that I tried it anyway. Had been trying for literally 4 months to get answers about some questions related to reporting tips properly on my taxes. Within 2 hours of signing up, I got a call back with an actual IRS agent on the line! The agent was able to look up my specific situation and gave me detailed guidance on how tips are currently classified and what documentation I need to maintain. Also confirmed that any policy changes would come with transition guidance. For anyone else struggling with IRS questions about the tip taxation issue or anything else - this service actually delivers what it promises. Saved me countless hours of frustration.
0 coins
Darcy Moore
Coming back to the original question about whether wealthy people could exploit a tip tax exemption - I think we're missing something important here. The proposal is likely aimed at service workers who receive tips as part of their regular compensation, not professionals who bill for services. If actually implemented, I'd expect the legislation to include specific definitions of qualified tipped employees - probably building on existing IRS definitions that focus on industries where tipping is customary (restaurants, hotels, transportation, etc).
0 coins
Dana Doyle
•But that's exactly the concern, right? Without extremely tight definitions, people find ways to game the system. I mean, tipping has expanded to so many industries now - you get tip prompts everywhere from coffee shops to retail stores. Where would they draw the line?
0 coins
Darcy Moore
•That's a fair point. The expansion of tipping culture does complicate things. I suspect any actual legislation would need to establish criteria like: the worker receives a reduced minimum wage under tip credit rules, the industry has a historical practice of tipping, and the tips are contemporaneous with service rather than contractually required. The IRS and Treasury would likely issue regulations clarifying these boundaries. Similar to how they've handled other tax provisions, they'd establish factors to determine legitimate tips versus disguised regular compensation. The challenge would be enforcement - they're already understaffed for existing tax issues.
0 coins
Liam Duke
Something nobody's mentioned yet - wouldn't this create a massive bookkeeping nightmare for businesses? I run a small cafe, and we'd have to completely change our payroll systems to track which income is taxable and which isn't. Plus there would be huge incentives for employees to classify everything possible as tips.
0 coins
Manny Lark
•I work in payroll software development, and yes, it would be a significant change. We'd need to create new income classifications, update tax withholding algorithms, and modify all the reporting. The IRS would also need new forms. It's not impossible, but would require substantial systems updates.
0 coins