The policy debate in the presidential election has a new focus: removing taxes on tips for tipped wage earners.
Both candidates announced their proposals to eliminate taxes on tips in Nevada, which has the highest workforce percentage of tipped workers at 5%. New Mexico’s percentage of tipped workers is 3.5%.
Kamala Harris’ announcement was different because it also included a pledge to raise the federal minimum wage.
This is a great sound bite for rallies and commercials, but behind the scenes it is more complicated.
A tipped wage earner is someone who customarily and regularly receives $30 or more a month in tips. In 2023, according to the Yale University Budget Lab, there were 4 million workers in this group, approximately 2.5% of the U.S. workforce.
Tipped wage earners are younger (17 to 34). Nationally, women are more likely to be tipped workers. According to the Tax Policy Center, women make up 71% of the tipped workforce while representing less than half of the current total workforce.
Food service, personal services and ride-sharing programs are the most tipped wage earner industries.
Statistics show there is spotty compliance in reporting tips, with some estimates showing only 50% of the income reported. Last year there was a 7% drop in tip amounts – indicating consumer resistance especially as more industries began to add it as an option.
The federal tipped minimum wage (sometimes referred to as the subminimum wage) is $2.13. Sixteen states stick with that amount. Other states have established their own tipped wage ranging from $2.23 in Delaware to $12.75 in Hawaii. New Mexico’s tipped wage amount is $3.
To add another twist, in New Mexico and other states, there are local options for cities to raise the tipped minimum wage above the state law amount. Three communities in New Mexico take advantage of this: Albuquerque’s is $7.20, Santa Fe’s is $4.36, and Las Cruces’ is $4.95.
No employer can legally pay a worker less than the federal minimum wage, which is $7.25 an hour. If a tipped wage earner does not get enough tips to close the gap and reach this figure, employers are required to make up the difference. Added to the mix, states can set their own minimum wage amount above $7.25. New Mexico’s minimum wage is $12. This is also subject to local option and Santa Fe’s minimum wage is now $14.60.
Closing the gap between the tipped wage and the required minimum wage, regardless of location, depends on consumers (those of us leaving tips) and the employers. Ultimately if employers fail to pay the required minimum wage, they can be subject to penalties such as fines, back pay requirements and in the most egregious cases, criminal filings.
Who benefits from these proposals is uncertain. According to experts at the American Enterprise Institute and the Tax Policy Center, it may not impact those who need it most — the lowest wage workers. More than one-third of tipped workers didn’t make enough to file federal taxes last year. Others who reached the threshold to file take advantage of the Earned Income Tax Credit or Child Tax credits, thus reducing their taxable income.
This is complicated, bureaucratic and hard for voters to understand.
Here is the good news. Across the country, states are eliminating the tipped wage and along with it, bureaucracy. Seven states have done it and five others have legislation pending, with hopes 20 states will accomplish this by 2025.
It’s simple: Workers are paid the minimum wage required by law in their state, and tips are still allowable.
Hopefully, the major party candidates will catch up with state innovation and propose elimination of the tipped wage and raising the federal minimum wage to $15 as proposed. Then everybody wins.
Submitted as Commentary
This column was submitted as a letter to the editor by the listed author. Publishing does not imply endorsement by The Paper or its staff. Submit yours at editor@abq.news
Removing tax on tipped wages
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The policy debate in the presidential election has a new focus: removing taxes on tips for tipped wage earners.
Both candidates announced their proposals to eliminate taxes on tips in Nevada, which has the highest workforce percentage of tipped workers at 5%. New Mexico’s percentage of tipped workers is 3.5%.
Kamala Harris’ announcement was different because it also included a pledge to raise the federal minimum wage.
This is a great sound bite for rallies and commercials, but behind the scenes it is more complicated.
A tipped wage earner is someone who customarily and regularly receives $30 or more a month in tips. In 2023, according to the Yale University Budget Lab, there were 4 million workers in this group, approximately 2.5% of the U.S. workforce.
Tipped wage earners are younger (17 to 34). Nationally, women are more likely to be tipped workers. According to the Tax Policy Center, women make up 71% of the tipped workforce while representing less than half of the current total workforce.
Food service, personal services and ride-sharing programs are the most tipped wage earner industries.
Statistics show there is spotty compliance in reporting tips, with some estimates showing only 50% of the income reported. Last year there was a 7% drop in tip amounts – indicating consumer resistance especially as more industries began to add it as an option.
The federal tipped minimum wage (sometimes referred to as the subminimum wage) is $2.13. Sixteen states stick with that amount. Other states have established their own tipped wage ranging from $2.23 in Delaware to $12.75 in Hawaii. New Mexico’s tipped wage amount is $3.
To add another twist, in New Mexico and other states, there are local options for cities to raise the tipped minimum wage above the state law amount. Three communities in New Mexico take advantage of this: Albuquerque’s is $7.20, Santa Fe’s is $4.36, and Las Cruces’ is $4.95.
No employer can legally pay a worker less than the federal minimum wage, which is $7.25 an hour. If a tipped wage earner does not get enough tips to close the gap and reach this figure, employers are required to make up the difference. Added to the mix, states can set their own minimum wage amount above $7.25. New Mexico’s minimum wage is $12. This is also subject to local option and Santa Fe’s minimum wage is now $14.60.
Closing the gap between the tipped wage and the required minimum wage, regardless of location, depends on consumers (those of us leaving tips) and the employers. Ultimately if employers fail to pay the required minimum wage, they can be subject to penalties such as fines, back pay requirements and in the most egregious cases, criminal filings.
Who benefits from these proposals is uncertain. According to experts at the American Enterprise Institute and the Tax Policy Center, it may not impact those who need it most — the lowest wage workers. More than one-third of tipped workers didn’t make enough to file federal taxes last year. Others who reached the threshold to file take advantage of the Earned Income Tax Credit or Child Tax credits, thus reducing their taxable income.
This is complicated, bureaucratic and hard for voters to understand.
Here is the good news. Across the country, states are eliminating the tipped wage and along with it, bureaucracy. Seven states have done it and five others have legislation pending, with hopes 20 states will accomplish this by 2025.
It’s simple: Workers are paid the minimum wage required by law in their state, and tips are still allowable.
Hopefully, the major party candidates will catch up with state innovation and propose elimination of the tipped wage and raising the federal minimum wage to $15 as proposed. Then everybody wins.
Submitted as Commentary
This column was submitted as a letter to the editor by the listed author. Publishing does not imply endorsement by The Paper or its staff. Submit yours at editor@abq.news
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