(LEX 18) — Filing taxes could soon look different for service workers who rely on tips because of President Donald Trump's massive new spending bill. While the change received bipartisan support in Congress, critics say it's problematic.
We wanted to know how the legislation could impact tipped workers in Kentucky, so we took our questions to a financial advisor at Joule Financial in Lexington.
"It's going to be different for different people," explained Logan Gilland. He said while no taxes on tips will likely not impact a large segment of the working population, it could be beneficial for certain service workers.
"It is going to help some people that maybe have multiple jobs, working in multiple places, and they're earning that tipped income," he said.
Under this temporary tax exemption, tipped workers can now deduct up to $25,000 of tipped income from their taxes. From that point on, tips will be federally taxed. The amount someone can deduct phases out after their income exceeds $150,000, or $300,000 for a couple filing jointly.
The deduction only applies to federal income tax, so tipped workers will still owe payroll taxes like Social Security and Medicare, plus state income taxes.
Some in the restaurant industry are not excited about the change, even if they stand to benefit. That includes Michael McDaniel, who works at both a popular sports bar and a high-end seafood restaurant in Lexington.
"I think for the most part it's just confusion, at the moment," he said. "Because no one's clear on what it means."
He also majored in economics and says the legislation as a whole isn't worth the potential benefits to his bank account.
"I think a lot of people in this industry are going to see some sticker shock," he said.
Analysts say the new policy will likely not have a major impact on lower-income tipped workers. According to the Yale Budget Lab, 4 million tipped workers in the U.S. made up 2.5% of the workforce in 2023. Of those workers, 37% don't make enough to pay federal income taxes.
For now, Gilland recommends tipped workers, from barbers and nail techs to Uber drivers and bartenders, wait for more federal guidance.
"The IRS is going to have to do a lot of work to figure out what the clarification is, write more publications on it," he said. "But once we learn more over the next couple of months, you can probably go to your HR department, talk to them about your withholding, that's the amount of money being taken out for taxes on your paycheck. You can get that reduced, now that you're not paying taxes on those tips you have."
