9 min read

Servers and other eligible tipped workers may benefit from a tax break that recently passed as part of Republicans’ budget bill. (Shawn Patrick Ouellette/Staff Photographer)

While campaigning for president, both Donald Trump and Kamala Harris promised to work to eliminate federal taxes on tips.

That pledge was included in Trump’s so-called “Big Beautiful Bill,” creating a new tax deduction for people working in certain jobs. But the exact impact of the tax cut, including exactly which jobs would qualify, and how much it would affect those workers’ paychecks, is still unclear.

We asked accountants, tax lawyers and others to tell us how the change will likely affect Maine’s hospitality workers. The bill was signed into law on July 4, so the specific rules and regulations governing it have not yet been issued. They’re expected within 90 days, said Hanna Wurgaft, an employment and labor law attorney at Brann & Isaacson.

In a statement, Nate Cloutier, government affairs director of HospitalityMaine, said, “For the next four years, servers and bartenders will be able to deduct (up to) $25,000 of their tips from federal taxes, while hourly employees benefit from a $12,500 deduction for premium overtime pay. This recognition puts more money back in the pockets of hard-working staff and could help restaurants and other hospitality businesses across Maine attract and retain the talent they need.”

Advertisement

The Maine minimum direct wage for tipped workers is currently $7.33 per hour. If tipped employees direct wage combined with their tips does not add up to the state’s standard minimum wage of $14.65 per hour, by law the restaurant must make up the difference, guaranteeing servers earn at least minimum wage. Maine cities may set their own minimum wage higher than the state does, in which case the tipped worker is owed the higher wage. In Portland, for instance, the minimum hourly wage for tipped workers is $7.75 and the city’s standard minimum wage is $15.50.

Rob Roy, longtime bar manager at Primo Restaurant in Rockland, said that 70% of his earnings in his most recent paycheck had come from tips. “Tips are a huge part of our income.”

Who is affected by the law?

The new legislation applies to workers who “customarily and regularly” receive tips, including people who serve food or beverages, as well as barbers, manicurists and estheticians. That said, the IRS has not yet released an official list of qualifying occupations. Given the importance of the restaurant industry in Maine, and the constant debate about tips, we’re focusing on restaurant employees.

In 2024, Maine had an estimated 8,500 waitstaff and 3,100 bartenders, “many more than that in summer and fewer in winter, obviously,” said Glenn Mills, deputy director at the Center for Workforce Research at the Maine Department of Labor.  

Under the new law, servers and other tipped workers can get a federal tax deduction of up to $25,000 on their tips. (Sofia Aldinio/Staff Photographer)

What does the new law do?

Until now, the IRS has treated tips and wages identically. The new law allows “qualified” individuals to take a $25,000 deduction from the portion of their income that is earned in tips, which lowers their annual tax liability.

Allen Braddock, corporate tax attorney at Pierce Atwood, compared it to deductions for retirement savings accounts, such as 401(k)s and Roth IRAs.

Advertisement

Take, for example, a tipped worker whose total income is $50,000, including $25,000 in tips. The new law means the worker could deduct the $25,000 in qualified tips from gross income, and would pay federal income tax only on the remaining $25,000 of income. At a 12% rate, that would result in federal tax savings of $3,000.

The deduction phases out for individual tax filers if they earn more than $150,000 in combined direct and tipped wages from a serving job and any other job (or $300,000 total for joint filers). The deduction for a waiter earning above these amounts would decrease by $100 for every $1,000 earned over $150,000.

Maine’s Department of Labor could not say whether any Maine waiters, bartenders or baristas earn over $150,000 per year. The deduction disappears entirely for a single server with total income of at least $275,000.

Does the law affect state and local taxes?

No. The deduction only applies to federal income taxes. Tipped employees must continue to pay FICA taxes to cover Social Security and Medicare.

When does the law take effect?

It is retroactive to Jan. 1, 2025, and ends on Dec. 31, 2028. According to experts, tax breaks commonly sunset after 10 years. Part of the impetus for the bill was to make permanent the otherwise soon-to-expire tax cuts Congress passed during Trump’s first term in office.

The tax break for tipped workers is set to expire after four years. (Ben McCanna/Staff Photographer)

Is it unusual for a tax regulation to target a particular employment sector? 

“You’re putting your finger on the political issue, right? This was a kind of a pandering political play, right, to seemingly address folks that are ostensibly making low wages,” said Bill Sheils, an attorney at Perkins Thompson who chairs the firm’s employment group.

Advertisement

It was widely reported during the presidential campaign that both candidates endorsed the no-tax-on-tips policy as a way to win over voters in the swing state of Nevada, many of whom work in the hospitality sector.

“I don’t want to lapse into the political here, but it is little unusual. Usually (tax breaks) would be home ownership, things like that, as opposed to specific classes of workers.”

Braddock agreed. “Traditionally, you haven’t seen exemptions for certain types of ordinary income like this. It does it raise a question of a certain type of fairness.”

Accountants at the Portland-based office of Baker Newman Noyes, who answered questions by email, added that “some modest” credits are given in the U.S. tax code to, for instance, educators and public safety personnel. But “it is far more common for Congress to provide benefits to employers,” they wrote. “This is so because tax code is not used simply to raise money; it is used to encourage social goals, and breaks are provided to employers to encourage them to hire employees in specific classes, like veterans, or those with a disability or criminal background.”

Are back-of-the-house workers, like cooks and dishwashers, eligible?

It’s not yet clear. The new law does include “tips received under any tip-sharing arrangement.” In June 2023, Maine amended its state law to allow back-of-the-house workers to be included in tip-sharing pools. But the new federal law says that taxpayers may take this tax break only if they were receiving tips “on or before Dec. 31, 2024.” If a Maine restaurant, bar or coffee shop was not sharing tips with the back of the house by then, it cannot change its policy now so that workers are eligible.

“I would say that Maine restaurants should tread carefully and consult with counsel before changing tip-sharing or tip pool agreements,” Wurgaft wrote in an email. “Whether wages earned by back-of-house workers under new tip pools will qualify for the tax deduction is arguably an open question.”

Advertisement

Neither HospitalityMaine nor the state’s Department of Labor has data on how many restaurants in Maine pool tips between the front and back of house. But according to data from the labor department, Maine bartenders (average wage: $26.76 per hour) and Maine servers (average wage $25.19 per hour), make more than any other job categories in food service, except for the head chef. The average wage for a cook is $21.31 per hour, and for a dishwasher, $16.85.

“I’m wondering what it’s going to be like in many restaurants,” Roy said. “Unless you’re in the perfect restaurant, there’s always a rift between the two. (Cooks) almost always make less money than our incentivized positions. The one thing that bugs me about this (legislation) is it really doesn’t benefit them as much.”

He added that the overtime provision of the bill could benefit cooks. In his two decades in Maine’s restaurant industry, he’s said that he’s observed cooks often work overtime. “So they’re getting a little bit of that,” Roy said, “but I’m wondering about the culture change in restaurants as it goes forward.”

What about mandatory service charges, such as gratuities for large parties or ‘kitchen wellness charges’?

Such fees do not qualify for the new tax break. The law specifies that tips must be “paid voluntarily.”

When will tipped workers see this savings?

Next year, when they file their 2025 tax returns. “It’s not something people are going to feel this week or in three months or six months necessarily,” Wurgaft said.

Eligible hospitality workers are expected to start seeing savings from the federal tax break next year. (Derek David/Staff Photographer)

“It hasn’t been much of a conversation in our place,” said Denae Mallari, operator and co-owner of Sinful Kitchen in Portland. “I feel like maybe people are waiting and trying to figure out, ‘How does this really pertain to me?'”

Advertisement

What is the impact on an ordinary server?

It could vary widely. The amount of the deduction is based on a person’s overall income: A married server who files jointly is affected by his spouse’s income, and a barista with a second job in another industry needs to count those wages, too, in her overall gross income.

The amount of savings a hospitality worker sees, if any, will depend on their income. (Ben McCanna/Staff Photographer)

“The law provides for the deduction, up to $25,000 in tips. But as a practical matter, that person working at the high-end restaurant, they may be making close to 150 grand if the tips are good, right? So they get to enjoy the benefit of this and they could exhaust their full $25,000 deduction,” Sheils said. “Meanwhile, the kid at the coffee shop isn’t going to come close to being able to claim 25 grand in tips.”

Wurgaft said the tax break will have less impact on the lowest earners as they may not have much, if any, federal tax liability in the first place. Possibly they are not earning enough to owe federal taxes — think of a college student with a summer job at a seasonal spot in Old Orchard Beach. Or perhaps other deductions they receive, for instance, child tax credits, mean they already owe no federal taxes.

“I’m not an economist, but using that $25,000 number as the cap, depending on how much a person makes in a year, it may or may not be a significant change,” she said.

“As far as tax cuts go, this focuses on a group of people that across the country don’t make a huge amount of money,” Roy said. “We’re not business people. We’re not lawyers. And I think it only lasts three years or so, so personally I’m seeing it as a nice little stimulus to me and those in in my profession.”

How will this tax break affect servers who don’t declare their tips? 

There’s often an assumption that servers underreport their tips to avoid paying taxes. But customers pay 95% of tips today on credit cards, said Jared Dinsmore, co-owner of Lucky Cheetah and Bird & Co., both in Portland, making it difficult for servers to avoid reporting their full income. “As we all know, it’s illegal to not pay taxes on any wages, whether they be wages or tips,” Dinsmore added.

Advertisement

Will restaurants need to make payroll changes?

Both hourly wages and tips are already listed separately on servers’ W-2 forms.

The change is so recent, Mallari said, her payroll company hasn’t yet been in touch with guidance. She herself has “just been kind of waiting. I’ve just been kind of holding steady and seeing how it plays out. I’m assuming it won’t change how I do things.”

“There’s no change that I’m aware of that the restaurant owner, the employer, needs to make. They just keep doing their thing,” Sheils said.

Could diners be inclined to tip less if they know that servers are getting a tax break? 

The tax deduction won’t have much impact on what diners tip, predicted Erin Percival Carter, an associate professor of marketing at Maine Business School at the University of Maine, while cautioning that no research yet exists on this topic.

A lot of research has been done, however, on how consumers react to taxes generally. The visibility, or “salience” of a tax is what most drives people’s behavior, she said. In this case, the tax impact is an unseen end-of-year tax break for servers so, “this is just not going to be very salient to most consumers,” she said.

“The things that we know tend to drive tipping behavior are social norms, like what do people think other people think is the expected behavior here? I’m probably going to tip 20% because that’s the normal thing to do,” Carter said. She added that tipping is increasingly being done using electronic interfaces, which research also shows also strongly influences customer behavior.  “There are buttons and you pick one of the buttons and you’re probably going to pick the middle button.

“And then there are basic norms around reciprocity and gratitude and not wanting to feel guilty. I think all of those are going to be so much more salient and strong that this probably won’t have much of an effect.”

Peggy is the editor of the Food & Dining section and the books page at the Portland Press Herald. Previously, she was executive editor of Cook’s Country, a Boston-based national magazine published...

Join the Conversation

Please sign into your CentralMaine.com account to participate in conversations below. If you do not have an account, you can register or subscribe. Questions? Please see our FAQs.