Tipping culture has changed significantly in recent years, especially with the emergence of self-checkout lanes and digital payment kiosks. A CBS News article recently questioned, "Are tip demands becoming excessive? ", highlighting the transition from customary tipping customs to contemporary situations such as tipping for takeout and coffee-to-go.
While the pandemic initially led to an increase in tipping to support service workers, many Americans now face financial constraints due to ongoing inflation. According to a recent PYMNTS and Lending Club report, nearly two-thirds of Americans are living paycheck to paycheck.
The topic of how much to tip and the potential tax ramifications are raised by this.
As tipping expectations expand to include new scenarios, such as at digital kiosks, the question of whether or not to tip-and how much-becomes more complex. Vincent Birardi, CFP and wealth advisor at Halbert Hargrove, advises, "One situation in which you should not be compelled to tip relates back to the automated kiosk. There shouldn't be this pressure on customers."
He recommends that if you receive exceptional service, a modest tip of $1 or $2 is appropriate, rather than the standard 20%.
Traditional tipped roles include waitstaff, taxi drivers, and salon workers. Dr. Peters told CNBC. "Tipped employees may also include front-of-house restaurant staff, bellhops, parking attendants, airport service workers, and food delivery workers," she said. These workers often rely on tips as a significant part of their income, and tipping remains customary in these contexts.
For services where tipping is optional, such as routine car maintenance or handyman visits, Birardi recommends a 10% to 20% tip if the service is exceptional. Alternatively, providing a meal or snack for service workers can be a budget-friendly way to show appreciation for services rendered.
Recent proposals from former President Donald Trump - the Republican Presidential nominee - and Vice President Kamala Harris - who received the Democratic nod after President Joe Biden bowed out of the race - suggest making tip income tax-exempt. The Senate bill, "No Tax on Tips Act," introduced by Sen. Ted Cruz, proposes a 100% above-the-line deduction for cash tips, while other bills, like the "Tax-Free Tips Act of 2024," aim to exempt tips from both income and payroll taxes.
These proposals reflect ongoing debates about how best to support tipped workers while managing tax policy. Trump and Harris's proposals are part of a broader conversation about tax relief and economic support. However, these proposals have potential drawbacks.
The Tax Foundation notes:
By making one type of income (tips) exempt from income tax, while other types of income (most importantly, wages) remain taxable, the proposal would make more employees and businesses interested in moving from full wages to a tip-based payment approach. That would mean more service industries adopting the restaurant industry approach of a list price up front and an expected voluntary tip at the end of the transaction.
As election season approaches, discussions about tax policy often bring tipping practices into the spotlight. Both Donald Trump and Kamala Harris have proposed changes that could significantly impact how tips are taxed. These proposals aim to alleviate the tax burden on service workers and potentially simplify the tax code. However, they also raise questions about fairness and effectiveness.
A concern not addressed by either candidate are the potential issues of Social Security and Medicare. Will their proposals also include tips being exempt from Social Security and Medicare taxes? If so, this could impact workers' retirement and Medicare benefits when they retire. Seems some of the bills introduced in Congress have considered that issue and do not exempt tips from payroll taxes while others do. We will have to wait and see.
Raising the standard deduction could potentially be a more effective way to provide tax relief to low- and middle-income earners. For instance, increasing the standard deduction by $6,000 would benefit both wage earners and tipped workers, unlike the no-tax-on-tips proposal, which might disproportionately benefit higher earners and complicate the tax system.
As Dr. Peters concluded her remarks, "You can always decide to tip a little more or less based on your financial situation and your appreciation for the service provided. The thought still counts the most."
When It's Okay Not to Tip
While tipping is generally expected, there are specific situations where it may be acceptable to forego a tip. Here are four scenarios:
The rise of tipping at digital payment kiosks and the proposed tax changes reflect ongoing shifts in how we view and manage tipping. While 20% remains the general rule of thumb for tipped services, it's important to tip according to your financial situation and the service received.
And, while the debate over tax-exempt tips continues, focusing on straightforward ways to support service workers and manage your finances effectively remains priority number one.