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USA Today
2 days ago
- Business
- USA Today
Automatic gratuities may not be eligible for new Trump tax break on tips
I don't like to think of myself as a bad tipper. Yet, I handed over what had to be a head-scratching tip about "no taxes on tips" to a waiter in Detroit one Saturday night in July. Did he realize that the automatic 20% tip on the bill at Andiamo's Detroit Riverfront could mean that he wouldn't get a tax break? We've heard plenty of "no tax on tips" talk this summer as President Donald Trump's "big, beautiful bill" worked its way through Congress to ultimately be signed into law July 4. Still, not much has been in the headlines about one possible trigger for tax-time indigestion involving tip income when a restaurant has an automatic gratuity on the bill. My waiter, though, wasn't about to engage in tax tips. He was waiting for his real one. He cut the conversation short by saying that "no tax on tips" will kick into gear next year so it doesn't matter now. He was only partly correct. What does 'no tax on tips' mean? The new, special tax break on tips is retroactive and applies to eligible tip income earned in all of 2025. Waiters, hairstylists and others who regularly receive tips this year will have to wait until next year to claim a deduction for tip income reported on their tax returns when they file 2025 returns. The special deduction can save plenty of workers good money whether they itemize their deductions or claim the standard deduction, as most people do these days. The tax break runs from 2025 through 2028. Employers still are required to withhold taxes from each paycheck for Social Security and Medicare, which are referred to as FICA or payroll taxes. About 6 million workers report tipped wages, according to the White House, including "waitresses and waiters, rideshare and food delivery drivers, taxi drivers, beauticians, hairdressers." By contrast, the Budget Lab at Yale University estimates that roughly 4 million people worked in occupations where workers regularly received tips in 2023 — or about 2.5% of all employment. Tipped workers tend to be younger than the rest of the U.S. workforce, with a median age of 31 years old, according to Budget Lab. One third of tipped workers, according to the study, are younger than 25. A sizable group had such low incomes — some 37% —that they faced no federal income tax in 2022, even before accounting for tax credits, such as the earned income tax credit, according to Budget Lab. Preparing for taxes: Will the 2026 tax season start late? IRS commissioner sparks speculation The IRS might treat 20% automatic tip differently Like many of the new tax breaks packed into the big, beautiful bill that I've written about this summer, some rules will trigger situations where "no tax on tips" still translates into a tax bill. Nothing is as simple as the catchphrase. The 2024 presidential race will be remembered for Trump's promise of "no taxes on tips." Eliminating all taxes on tips, though, isn't on the menu when you peruse the big bill. Simply put, some complex rules will determine what tips will still be taxed and what tips won't be taxed under a new deduction for tipped income. And tax professionals remain on edge now, waiting for the Internal Revenue Service to issue more guidance. Waiters and others who benefit from automatic gratuities of 20% or more could be in for quite a shock, according to some early analysis. Tom O'Saben, enrolled agent and director of tax content and government relations for the National Association of Tax Professionals, and other tax experts are raising red flags about "mandatory tips." "When a restaurant automatically adds a 20% service charge, that amount is considered a mandatory service fee, not a tip under the IRS's rules — and not eligible for the new tip income tax deduction," O'Saben told the Detroit Free Press, part of the USA TODAY Network. The IRS, he said, takes the position that a tip must be voluntary, not required by the employer or establishment, paid freely by the customer and given directly or indirectly to the worker to qualify for the tax break. It's likely, O'Saben said, that servers will still be required to pay taxes on automatic gratuities. Again, we have yet to see whether the IRS offers guidance that specifically excludes mandatory service fees from being eligible for the tax deduction for tip income. But tax professionals see the writing on the wall. Janet Holtzblatt, senior fellow at the Urban Institute-Brookings Tax Policy Center, shares a similar viewpoint about potential exclusions. According to the new tax act, Holtzblatt said, tips that qualify for a tax break involve amounts that are 'paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor.' These simple words, "'voluntarily and determined by the payor,' may make a big difference in paychecks," Holtzblatt wrote in a July 24 blog that urged quick guidance from the IRS to clarify key details that Congress left unresolved. "Workers might be very disappointed if the IRS relies on the same guidance used for the existing credit for employers' share of Social Security taxes paid on tips," she said. She noted that it has been estimated that 16% of restaurants regularly add a service charge to the bill, and 54% sometimes do, such as for larger groups of six or more people at a table. The issue is particularly of concern, Holtzblatt said, in areas, like Washington, D.C., where 20% service fees are increasingly part of bills being handed to consumers. There's another wrinkle to the treatment of service fees, she said. While they look like a gratuity, the service fee may also cover part of the owner's nonlabor costs. Restaurants wait for more IRS guidance Restaurants find themselves still navigating the new tax rules and waiting for IRS guidance. Peter Gray, chief financial officer for the Joe Vicari Restaurant Group, which includes Andiamo Detroit Riverfront, told the Detroit Free Press that the tax laws surrounding tips and tip credits are still very new, and the rules and regulations are still developing. "We are working closely with our team members and payroll company to ensure everybody is educated properly on these new tax laws and how they need to be handled and reported," Gray said in a statement to the Free Press. "This will also require some additional guidance from the IRS on these new laws so we can ensure we are handling things properly and making decisions that are best suited for our company and team members." Beverly Hills Grill in Oakland County, which adds an automatic 20% gratuity onto its bills, plans to continue the practice right now, but owner Raphael Michael is "reviewing all the guidelines with his CPA and financial advisers," according to spokesperson Sari Cicurel. According to the restaurant's certified public accountant, Cicurel said, the automatic gratuity of 20% is not mandatory and "no tax on tips" would apply to the restaurant's employees. The IRS fact sheet listed on its website says "no tax on tips" applies to qualified tips that are "voluntary cash or charged tips received from customers or through tip sharing." These tips, the IRS stated, "are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137." During the 2025 transition, O'Saben said, the IRS will permit reasonable estimates for the deduction period. But, he said, the IRS is going to require that companies ultimately update their payroll systems and earnings codes. Some changes could be ahead for 'mandatory' tips Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois, said he'd expect that restaurants would need to shift away from mandatory tips or service fees for employees to qualify for the deduction. "The provision requires that the tip be 'voluntarily given,' which would appear to exclude automatic add-ons," Luscombe said. Scott Klein, senior manager for tax policy and advocacy with the American Institute of CPAs, throws another wrinkle into the mix. Klein agrees the IRS will likely view an automatic gratuity as a tip that is not voluntary and does not qualify for a tax break. "However, any discretionary amount given as a tip in addition to the service charge would be considered a qualified tip," Klein said. Add another $5 on top of a $20 automatic gratuity, for example, and he'd say that extra $5 should be eligible for the tax deduction. "This tip provision could be a reason for restaurants to reapproach the decision to charge an automatic gratuity," Klein said. The IRS will tell us more by October By Oct. 2, the IRS is expected to release a list of "approved tip recipients" who could qualify for the "no tax on tips" tax deduction. We're talking about a new tax deduction for those who work in jobs where cash tips are typically expected. The IRS will be looking at whether the workers "customarily and regularly" received tips before Jan. 1, 2025, to prevent abuse, such as someone suddenly classifying regular wages as tips. "The approved list may not extend far beyond the restaurant, beverage, hospitality and hair care industries specifically mentioned in the legislation," Luscombe warned. Yet, Klein said consumers are experiencing a growing prevalence of tipping across industries so some additional industries might be included in the IRS list. Given some of the uncertainties now, Klein said, employers and employees should keep an accurate account of tips received so that they can account for them if the new federal income tax deduction allows them a tax break. Remember, employees can deduct only tips that are properly reported to employers and reflected on tax statements. (And, yes, some did not report all of their tip money, especially what was received in cash, to the IRS over the years.) Workers still must report all tips to their employers if they total $20 or more in a single month, according to the Budget Lab. Employers, Klein said, should continue to track tips, and should identify and categorize automatic and voluntary gratuities separately as they await more guidance. Tipped restaurant workers already are required to report tips earned during a shift and tips are already listed on a separate line on their annual W-2 form and that's not expected to change, according to the National Restaurant Association. Klein said he expects the IRS to give more details on how the agency plans to implement the deduction on Form 1040. The IRS is expected to update withholding procedures. He'd expect the creation of a worksheet for the "no tax on tips" deduction that will likely include a modified adjusted gross income calculator for the tip deduction phaseout and occupation codes for tip eligibility. How much in tips could be tax free? The "no tax on tips" break could disappoint some who generate a great deal of money in tips during a year — especially if both spouses work in such jobs. The new law appears to stipulate that the maximum annual deduction for tip income is $25,000 per tax return — not $25,000 for each employee listed on a joint return, according to how O'Saben and Luscombe read the tax bill. We will need more clarity from the IRS guidance. For reference, the maximum deduction for the new tax break on overtime pay is $12,500 for singles and $25,000 for joint filers each year. Married people who file separately — even if one earned $20,000 in tips — are not permitted to claim the "no tax on tips" deduction at all. They would owe taxes on all their tip income. What's straightforward: Will a $25,000 limit for the deduction cover everyone's tips for the year? O'Saben said part-time or lower-volume workers might see that all or most of their tips will qualify for a tax break at the $25,000 threshold or less. According to an example give by the Bipartisan Policy Center, a single taxpayer earning $50,000 — including $5,000 in tips — could save $600 with the new tax deduction on tip income. But some high-volume servers, servers at high-end restaurants, those working in luxury hospitality, and casino workers are the most likely to earn a great deal of tip income. While many might still save thousands of dollars in taxes, experts say many of these taxpayers would owe taxes on tip income above the $25,000 threshold. Luscombe noted that the Congressional Research Service issued an "In Focus" on July 31, 2024, that estimated the median tip income was $2,600 each year while the average tips income was $6,000 per year, indicating that there are a few tip recipients who receive a large amount in tips, raising the average. But some won't get any tax break at all — if they had so little income that they're not paying taxes. Almost any single taxpayer making less than $15,750 and married couples making less than $31,500 in 2025, according to the Bipartisan Policy Center, will pay nothing in federal income taxes already due to taking the standard deduction. As a result, an additional tax deduction on tip income tips will not benefit those taxpayers because it does nothing to reduce their tax liability further. The White House states online that workers on average will receive about $1,300 more from "no tax on tips" each year that the tax break remains in place. We're dealing with a lot to digest here. Maybe it doesn't hurt to think of these tax breaks like tiramisu. The Italian dessert never quite tastes the same no matter where you order it. Ditto for "no tax on tips." How much this tax break pulls you up will depend on where you work, what kind of tips you get and more. Contact personal finance columnist Susan Tompor: stompor@ Follow her on X @tompor.
Newsweek
08-08-2025
- Business
- Newsweek
Americans Are Confused About How Social Security Works: Poll
Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources. A new poll has found there is widespread confusion among Americans about the fundamentals of Social Security—the cornerstone of retirement income for millions in U.S. Over half of respondents (55 percent) in the Cato Institute's August 2025 Social Security Survey, conducted by Morning Consult with 2,200 Americans, said that they do not know how the retirement benefits system is funded, despite its central role in retirement planning. Forty-five percent of those surveyed correctly noted that today's workforce pays Social Security taxes that fund benefits for current retirees and that future workers will do the same for their generation. Nearly a quarter (23 percent) said they mistakenly believe that their Social Security taxes are saved in a personal account that is exclusively for them, while 32 percent said they don't know how the system is financed at all. When it comes to how benefits are calculated, there is also some confusion. While 60 percent said they recognize that workers who pay more into Social Security receive larger benefits, 15 percent incorrectly think that all retirees get the same amount and another 25 percent said they are unsure. When it comes to the scale of Social Security benefits, there is still a significant knowledge gap. An overwhelming 91 percent of respondents were unaware that the maximum annual benefit can reach $60,000 per year. The average monthly benefit is $2,005.05 as of June 2025—netting just over $24,000 a year before any taxation. However, only 25 percent correctly estimated that the average benefit falls between $20,000 and $29,000 per year. Meanwhile, 38 percent underestimated the average benefit amount, 17 percent overestimated it, and 19 percent said they were unsure. A Social Security card with U.S. Dollars. A Social Security card with U.S. Dollars. GETTY How Is Social Security Funded? Social Security operates on a "pay-as-you-go" system funded primarily through payroll taxes collected under the Federal Insurance Contributions Act (FICA). Workers and their employers each contribute 6.2 percent of wages, up to a taxable earnings cap ($168,000 in 2025), which goes into the Social Security Trust Fund. These funds are then used to pay monthly benefits to current retirees, survivors and disabled beneficiaries. The program is designed so that today's workers essentially fund the benefits of today's retirees, with the expectation that future workers will do the same for them when they retire. Funding of Social Security has often been considered a "third rail" issue in American politics, meaning that targeting it for notable cuts or changes could be politically perilous to members of either party. The program is expected to run out of funds in the coming years if no action is taken by Congress. According to the latest Social Security Trustees report, the program's two trust funds—the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) funds—are projected to reach insolvency by 2034. If no solution is found, benefits would rely entirely on incoming payroll taxes, resulting in shortfalls of approximately 21 percent. This is not the first time Social Security has faced a financial cliff. In the early 1980s, the trust funds also approached insolvency. In response, Congress enacted a series of reforms, including accelerating payroll tax hikes, gradually increasing the retirement age, and taxing a portion of Social Security benefits.
Economic Times
06-08-2025
- Business
- Economic Times
US bill may end tax break for foreign students on OPT
A new immigration bill in the US Congress could end a long-standing tax exemption for international students working under the Optional Practical Training (OPT) programme. The proposal, part of the broader DIGNITY Act of 2025, would make foreign graduates liable for Social Security and Medicare taxes, also known as FICA, raising concerns across university campuses and immigrant support groups. The OPT programme allows international students in the US to work in their field of study for up to 12 months—or 36 months for science, technology, engineering and math (STEM) graduates—after completing their degrees. Currently, OPT participants are exempt from FICA taxes, which amount to a combined 15.3% payroll deduction split between employee and employer. FICA taxes for OPT: From exemption to deduction Under existing law, wages earned by OPT participants are treated as nonresident income and are exempt from the 6.2% Social Security and 1.45% Medicare taxes. If the proposed change becomes law, OPT workers would be treated the same as US employees for tax purposes, requiring both workers and employers to pay their share of the 15.3% payroll tax. This could add hundreds or thousands of dollars in annual tax deductions for international students already dealing with high tuition fees and rising living costs. DIGNITY Act provisions: Immigration, tax, and visa reforms The proposal is included in the DIGNITY Act of 2025, reintroduced this summer by Congresswomen María Elvira Salazar and Veronica Escobar. Marketed as a bipartisan immigration reform package, the Act includes provisions to legalize undocumented immigrants, enhance border security, and revise student visa policies. However, critics say the FICA provision contradicts the Act's stated goal of maintaining US competitiveness. They argue that taxing international students could discourage them from studying or working in the US, weakening the country's appeal as a global education destination. OPT debate intensifies amid political shifts The OPT programme has increasingly become part of a wider debate around immigration and labor. Some conservative lawmakers argue that OPT provides foreign graduates with an edge over domestic job seekers, particularly in technology and engineering roles. Joseph Edlow, the newly appointed director of US Citizenship and Immigration Services (USCIS), has been critical of the programme. 'The programme is ripe for abuse,' Edlow said. 'It's a workaround for employers seeking cheaper labor.' His comments reflect growing Republican support for tighter visa rules and expanded taxation of international student workers. Impact on hiring, enrolments and education value Beyond student finances, the proposed change could affect how employers hire. Businesses that currently hire OPT graduates without paying payroll tax would face new costs. This may prompt some employers—especially startups and small firms—to hire fewer OPT workers or move jobs offshore. US universities also see the move as a potential deterrent for future students. A reduction in international enrolments could affect research output and revenue, especially in technical fields that depend on overseas talent. According to US Department of Homeland Security data, over 200,000 international students take part in OPT every year, with most employed in sectors such as healthcare, IT and engineering. Unlike Social Security taxes, which have a wage cap of $176,100 for 2025, Medicare taxes apply to all earnings—meaning every dollar earned by OPT students could be taxed. How close is the DIGNITY Act to becoming a reality? The DIGNITY Act is still moving through Congress and is likely to face pushback. Universities, student associations, and parts of the private sector are expected to oppose the removal of FICA exemptions. However, the inclusion of this tax proposal signals a broader shift in US immigration and education policy—one that may increasingly view international students not just as learners, but also as taxable workers. For many students considering education in the US, the cost-benefit equation may soon change.
Time of India
06-08-2025
- Business
- Time of India
US bill may end tax break for foreign students on OPT
Academy Empower your mind, elevate your skills You Might Also Like: New immigration bill proposes $20,000 option for applicants to skip the 10-year green card queue A new immigration bill in the US Congress could end a long-standing tax exemption for international students working under the Optional Practical Training (OPT) programme. The proposal, part of the broader DIGNITY Act of 2025, would make foreign graduates liable for Social Security and Medicare taxes , also known as FICA, raising concerns across university campuses and immigrant support OPT programme allows international students in the US to work in their field of study for up to 12 months—or 36 months for science, technology, engineering and math (STEM) graduates—after completing their degrees. Currently, OPT participants are exempt from FICA taxes, which amount to a combined 15.3% payroll deduction split between employee and existing law, wages earned by OPT participants are treated as nonresident income and are exempt from the 6.2% Social Security and 1.45% Medicare taxes. If the proposed change becomes law, OPT workers would be treated the same as US employees for tax purposes, requiring both workers and employers to pay their share of the 15.3% payroll could add hundreds or thousands of dollars in annual tax deductions for international students already dealing with high tuition fees and rising living proposal is included in the DIGNITY Act of 2025, reintroduced this summer by Congresswomen María Elvira Salazar and Veronica Escobar. Marketed as a bipartisan immigration reform package, the Act includes provisions to legalize undocumented immigrants, enhance border security, and revise student visa critics say the FICA provision contradicts the Act's stated goal of maintaining US competitiveness. They argue that taxing international students could discourage them from studying or working in the US, weakening the country's appeal as a global education OPT programme has increasingly become part of a wider debate around immigration and labor. Some conservative lawmakers argue that OPT provides foreign graduates with an edge over domestic job seekers, particularly in technology and engineering Edlow, the newly appointed director of US Citizenship and Immigration Services (USCIS), has been critical of the programme. 'The programme is ripe for abuse,' Edlow said. 'It's a workaround for employers seeking cheaper labor.'His comments reflect growing Republican support for tighter visa rules and expanded taxation of international student student finances, the proposed change could affect how employers hire. Businesses that currently hire OPT graduates without paying payroll tax would face new costs. This may prompt some employers—especially startups and small firms—to hire fewer OPT workers or move jobs universities also see the move as a potential deterrent for future students. A reduction in international enrolments could affect research output and revenue, especially in technical fields that depend on overseas to US Department of Homeland Security data, over 200,000 international students take part in OPT every year, with most employed in sectors such as healthcare, IT and engineering. Unlike Social Security taxes , which have a wage cap of $176,100 for 2025, Medicare taxes apply to all earnings—meaning every dollar earned by OPT students could be DIGNITY Act is still moving through Congress and is likely to face pushback. Universities, student associations, and parts of the private sector are expected to oppose the removal of FICA the inclusion of this tax proposal signals a broader shift in US immigration and education policy—one that may increasingly view international students not just as learners, but also as taxable many students considering education in the US, the cost-benefit equation may soon change.
The Hill
24-06-2025
- Business
- The Hill
Social Security's dirty little secret: A Game of borrowing
The Social Security trustees have released their annual report highlighting 'the current and projected financial status' of the Social Security trust fund. And the media duly reported on the fund's declining prospects. But neither the trustees nor the media revealed, or typically even acknowledged, the trust fund's dirty little secret. First, a short explanation of how Social Security works. Social Security is a pay-as-you-go system. The FICA payroll tax (12.4 percent) is taken from current workers and employers and deposited into the Social Security trust fund. The government then uses that trust-fund money to pay current retirees. Money in, money out. For most of Social Security's history, current workers were paying in more than was needed to pay retiree benefits, leaving annual trust-fund surpluses. This is why, today, the trust fund boasts some $2.5 trillion in assets, which leaves the impression that there is something like a savings account that can be used to pay Social Security benefits. Unfortunately, however, since 2010 the government has spent more paying benefits that it has received from workers' payroll taxes each year. The government has had to draw upon the trust fund surplus to make up the difference. According to what the trustees call their 'best estimates,' 'The Old-Age and Survivors Insurance (OASI) Trust Fund [that is, Social Security] will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report. At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 77 percent of total scheduled benefits.' The key thing to notice is the claim that by 2033 'the fund's reserves will become depleted.' But what if the trust fund is already essentially, if not technically, depleted? The trustees report that the OASI trust fund had $2.641 trillion at the end of 2023. The trust fund received $1.106 trillion in payroll taxes in 2024, plus $54 billion from taxes collected on Social Security benefits and $64 billion in interest. That's a total income of $1.224 trillion. However, Social Security paid out $1.327 trillion in 2024 — more than it received — meaning it had to withdraw $103 billion from the trust fund, leaving $2.538 trillion. And then here's the dirty little secret about the trust fund: That $2.5 trillion isn't invested in stocks or bonds or loaned out to interest-paying banks or companies. The federal government has borrowed that money and spent it, writing itself interest-bearing IOUs. As the Peter G. Peterson Foundation explains, 'As with other trust funds, Social Security's surpluses are credited with securities issued by the Treasury; that excess income is used to reduce the amount of new federal borrowing necessary to finance governmental activities.' Consider this situation in a family context. Suppose a family's income is usually enough to pay the bills each month. But an unexpected debt — perhaps a car repair bill, a hospital visit, home repair, etc. — arrives, and it's more than the family's normal budget. If the family has other real assets, it can withdraw funds from a savings account or perhaps a brokerage account and pay the debt. Problem solved. But if the family doesn't have other real assets available, it might have to borrow the money to pay the debt — creating new debt to pay old debt. When the trustees speak of drawing down the 'fund's reserves,' it sounds like the government is doing what the family did when it tapped other assets to pay the unexpected debt. But that's not what's really happening. If the government's general account had a budget surplus in 2024, then the government could just transfer $103 billion from the general account to the trust fund. But the federal government had a $1.8 trillion deficit in 2024. So, in order to cover that $103 billion trust fund shortfall to pay current retirees, the government had to borrow the money. Creating new debt to pay old debt. It's even borrowing money at interest to pay the trust fund interest. Whenever anyone exposes this borrowing shell game, defenders of Social Security's pay-as-you-go system — usually Democrats — vigorously respond by saying the federal government has never defaulted on its debt. But that misses the point. The trust fund's assets are just an entry on paper. If the Social Security trust fund wants to redeem some of its IOUs, the government must borrow the money to pay it. So, when the trustees warn that by 2033 Social Security won't have the money to pay retirees' full benefits, it would be more accurate to say it already doesn't have the money to pay full benefits now. Merrill Matthews is a public policy and political analyst and the co-author of 'On the Edge: America Faces the Entitlements Cliff.'.
