Over 500 Restaurant Owners in 47 States and Territories Urge Congress to Reconsider “No Tax on Tips” Proposal to Better Protect Restaurant Workers
Independent Restaurateurs Argue Proposed Tax Exemption for Tips Will “Do More Harm Than Good” in Letter to Congress and Urge Amendments to Address Service Charges
Independent Restaurant Coalition Proposed the “Service Charge Fairness Act” in 2024
WASHINGTON, D.C. – More than 500 business owners and restaurant workers affiliated with the Independent Restaurant Coalition (IRC) sent a letter to Congressional leadership today urging changes to the “No Tax on Tips” provision in the proposed budget reconciliation package. The independent restaurant and bar owners and workers from over 47 states and territories argue the proposal is unfair and will “do more harm than good” to the industry.
The independent restaurant owners and workers write: “We strongly urge Congress to amend the ‘No Tax on Tips’ provision in the proposed budget reconciliation package. Small business owners understand that tax policy should be fair and equitable for all our employees—not just a few. As written, the ‘No Tax on Tips’ provision would leave behind dishwashers, chefs, porters, and other workers who will still be taxed on their wages. The proposed tax exemption for tips will ultimately do more harm than good to the over 11 million people who rely on restaurants and bars for their livelihood—and at a time when they can least afford it.”
“Independent restaurants are economic and social anchors within our communities, which is why I’m joining more than 400 business owners from 46 states and territories who have already urged Congress to adopt fairer, more inclusive tax policies that protect our workforce. Thank you for your consideration and ongoing support of independent restaurants, our dedicated workers, and their families.”
Under the Fair Labor Standards Act (FLSA), only workers in customer-facing roles are legally eligible to receive tips. That is one reason why independent restaurants and bars are increasingly using service charges—not tipping—to ensure more of their workforce earn a fair, livable wage. Under current IRS rules, restaurant service charges are treated as business income—not employee income—penalizing business owners trying to do right by their workers. The IRC is seeking changes to the “No Tax on Tips” provision to include service charges used expressly for employee compensation—a commonsense fix that would treat service charges like tips for tax purposes. The Independent Restaurant Coalition first proposed the Service Charge Fairness Act in 2024.
“A tax policy that ignores a majority of a restaurant's workforce is unfair and untenable,” said Erika Polmar, Executive Director of the Independent Restaurant Coalition. “Federal law currently decides who can be tipped and as of now it excludes the majority of a restaurant’s workforce. Essential personnel like line cooks, dishwashers, porters and others aren’t eligible for relief, for example. Restaurants need every tool available to support their teams and their communities, especially as they adopt compensation models like service charges to ensure livable wages across the board. Congress must fix this provision to reflect how restaurants actually operate today.”
Economists are raising concerns about the No Tax on Tips proposal. A report from the Economic Policy Institute argues the proposal would incentivize employers across industries to prompt for tips and reclassify workers to avoid paying minimum wage. The Congressional Budget Office projects that the No Tax on Tips proposal could increase the deficit by $40 billion through 2028. The Yale Budget Lab warns that “a tax break that favors one form of income over others creates opportunities for tax avoidance,” noting the true cost of the legislation will be hard to predict.