When Congress passed the “No Tax on Tips” bill in the U.S. House of Representatives in May, it was vaunted as a rare policy win for service workers.
The legislation, supported by both Donald Trump and Kamala Harris on the 2024 campaign trail, would allow tipped employees to deduct up to $25,000 in tip income from their federal taxes. The tax break is projected to save eligible workers an average of $1,800 per year.
But the Independent Restaurant Coalition (IRC), which was formed during the COVID-19 pandemic and represents thousands of independent restaurants and bars nationwide, says the policy has serious drawbacks and is lobbying for changes to it. According to the group’s vice president—James Beard Award–nominated chef Cheetie Kumar, who owns Ajja in Raleigh—the proposal would primarily benefit higher-earning tipped workers while neglecting the industry’s lowest-paid employees, incentivizing employers to stick with a tipping system rooted in discriminatory practices.
Under federal law, restaurants that pay tipped workers the sub-minimum wage of $2.13 per hour can share tips only among front-of-house workers. Back-of-house employees like cooks and dishwashers are excluded from tip pools at these establishments to prevent employers from exploiting the sub-minimum-wage system. So while servers could see significant savings on their taxes under the proposal, kitchen workers would receive no benefit, deepening existing disparities.
Some restaurants, including Kumar’s, have found ways to address these inequities by paying employees above the federal minimum wage and implementing tip-sharing programs. Others have installed service charges: mandatory fees technically categorized as restaurant revenue, not tips, that can be distributed more equitably among staff. But because the “No Tax on Tips” proposal encourages workers to earn a larger portion of their income through tips, and because service charge income wouldn’t qualify for the tax break, the legislation could discourage workers from taking jobs at restaurants with nontraditional tipping structures and thwart employers’ efforts to move toward fairer wage systems.
The IRC is lobbying for Congress to amend the legislation to encompass service charges before the bill reaches the Senate, arguing that employees compensated through these fees should receive the same tax break as traditionally tipped workers.
The INDY spoke with Kumar to learn more about the complexities of restaurant wage structures, why she believes the current legislation falls short, and what policies could better serve both restaurant workers and owners.
INDY: Before we get into this specific piece of legislation, I want to ask you about the institution of tipping. Tipping is deeply entrenched in American restaurant culture, and there are certainly many people who appreciate the potential to earn more than a fixed wage. But there’s also a case to be made that tipping creates unequal pay for equal work, perpetuates discrimination, creates pay disparities between front-of-house and back-of-house restaurant workers, and forces workers to justify their value to customers rather than being guaranteed fair compensation by employers.
Cheetie Kumar: Historically, tipping was not a part of American restaurant culture. Tipping was really part of the wealth culture of Europe. When America was founded, Americans were vehemently against tipping because they thought it was a holdover from the king’s court and aristocracy.
It was after [slavery ended] that people got creative about how to prolong not paying people for their work, especially Black people who were looking for jobs. When the train industry started becoming a thing, they were hiring Black men, mostly to be part of the hospitality program, and they didn’t want to pay them, so they started tipping. They did a whole propaganda campaign about tipping, and it became entrenched so that it became OK to pay people a sub-minimum wage.
It’s a system set up for making people view restaurant work, and especially serving work, as a kind of temporary thing, not a “real job.” It delegitimizes the industry and makes it like a monoculture. As American restaurants and food culture have evolved, we’ve started having a very robust culture of independent restaurants that are an incredibly important part of the economy. We employ 15 million people in just independent restaurants. It’s almost a trillion-dollar industry in this country.
During the pandemic, everybody was having conversations about change: Why do we have to settle for our lives to be this way? Why do we have to settle for restaurants to operate this way? All of these big topics became part of the conversation. When [Garland, Kumar’s former downtown Raleigh restaurant] reopened, we were doing patio seating only and some takeout. We were basically a kitchen crew with a couple of food runners. So we decided to try this program where everybody was making well above the federal minimum wage, and we created a tip-share system where we could share the tips that came in.
We’ve stuck with that this whole time, and it’s evolved. It reflects the mission of our restaurant and the culture. When it’s busy, everybody makes more money, but we’re all in it together. Servers still make more money than cooks—that’s the reality of running a restaurant. I can’t hire quality staff if I can’t offer a competitive wage. But what it’s done is allow us to pay our kitchen staff a lot more than a lot of restaurants, and we’ve subsequently developed a great culture where there’s very little tension between the cooks and the servers.
To be clear, the reason you’re legally able to distribute tips to back-of-house workers is because you are paying servers more than the federal minimum wage of $7.25 an hour, right? Otherwise—if you were paying servers less than $7.25 an hour—you wouldn’t legally be allowed to share their tips with the back of house?
Correct. There’s still a limit to the percentage that we can do a tip share with. A lot of places tip out the barback, bartender, host, and food runners. We just made that all structured in a spreadsheet, so we take that percentage that would normally go to support staff and distribute it with everybody [including back-of-house staff]. The servers still keep the majority of their tips, but that remainder goes to every single person on the team.
I’m not the only restaurant owner that hates tipping culture but doesn’t feel like they can really go to a service charge model. The [diner’s] perception of the service charge is “Oh, this is too expensive,” even though people will end up paying even more [than they would pay for a service charge] when they tip.
When you say service charge, are you talking about an automatic gratuity?
These words really matter. When you call something a gratuity, it 100 percent belongs to the tipped workers. There are laws from state to state that determine whether or not that tip can be shared with other people on the team, and especially laws in several states about whether cooks can partake in any share of the tip. That’s to prevent owners from paying kitchen workers sub-minimum wage and stealing tips. Those protections are in place, but nobody anticipated that people would want to have an institution where you invest more in your service team and create this overarching benefit from tips that goes to everybody.
A service charge, the way it’s structured right now, is part of revenue. There’s no law that says all of the service charges have to go to your employees—an owner can do whatever they want with the service charge. It’s taxed like income, so it becomes part of your top-line revenue. You pay taxes on it, and if you use it for payroll, you pay payroll taxes on it. What we would like to see is to make it not be considered revenue, so you’re not taxed twice on it if you use 100 percent of it for your payroll. You’re just paying payroll tax on it.
There’s also something called the tip credit. If you have tipped workers, you get a tax break, because most people with tipped workers pay their servers less than $7.25 an hour—they pay them $2.15, $2.50, or $3 an hour. So it’s a benefit for employers to use that awful structure, but there’s no benefit for employers who want to create a workplace where everybody makes $17, $18, $20 an hour, whether you’re a server or kitchen staff. If the service charge is included in your meal, you don’t have to think about tipping. You just pay, and you’re on your merry way. That would be a clean way to do it, and a lot of countries in Europe do it that way.
I have a friend who’s a restaurant owner in Milwaukee, and he pays $70,000 extra a year in taxes because he chooses to run his restaurant in a way that aligns with his values. We just think that’s unfair. If we’re going to open up tipping to be nontaxable, this is a real opportunity for us to open this Pandora’s box and really clean it up. If you really want to benefit people in the hospitality industry—let’s go, but let’s make it for everybody. Let’s invest in our people.
If I were a policymaker, I’d be like, “Maybe I should talk to somebody in the industry.” Nobody’s talked to us. Nobody’s consulted with us. We give them our ideas, and they say, “Oh, I had no idea,” and then nothing happens. What this will inadvertently do is really codify the sub-minimum wage, which is something we’re hoping to work against. What this does is say: “Tips are here to stay, and there’s an additional benefit to being a tip-structured employer.” It’s rooted in Jim Crow, and it’s frustrating because the opportunity is right there.
People are making decisions for our industry, and we’re in a glass box watching them do it. The IRC is absolutely engaged in the conversation: we’ve had meetings with so many lawmakers, with Mike Johnson’s office, even the White House. But I think at the end of the day, this bill is so massive and complicated, I don’t know if anybody in the Senate or House is motivated enough to really open it up.
It sounds like you’re getting the sense that, even though legislators might recognize there are things in this proposal that should be changed, the changes aren’t happening. Why do you think that is? Why is it getting pushed through? Is there some kind of ulterior motive, or is it just that it’s a really politically popular idea, so no one wants to—
Exactly. I think nobody wants to appear as though they’re against “No Tax on Tips,” because the working class is getting screwed over and over again. It doesn’t make for a great sound bite to say “‘No Tax on Tips’ is good, but we want to do this instead.”
It’s just so wild to me. This isn’t really going to help restaurants. It’s going to help a select few people in this industry for a short time. This is a very expensive proposal—it’s going to cost the government billions of dollars. Then there’s a North Carolina bill that mirrors this for North Carolina tax. We could use that money in so many ways that would stabilize and incentivize people to work in restaurants, keep restaurants open, source better, have really thriving wages for people to be actual sustainable businesses—by sustainable, I mean climate-wise, people-wise, culture-wise, profitability-wise.
How could it be spent, specifically?
I would love to see a tax credit for having good labor practices—that would be amazing, and we could pay our people more. I would love to see an ability for all restaurants to provide health insurance to their workers. That would have a massive impact on our industry.
I would love to see some sort of reward for buying from local farmers and supporting our local economy and agricultural industry, especially in North Carolina, where we grow amazing produce, raise amazing protein, have fisheries and cheese makers. There’s so much here, and we do those things not for a financial benefit, but it would be nice if it benefited both the farmer and the restaurant for working together and keeping the economy in North Carolina strong.
Can you name some specific changes you would make to improve the current proposal?
I would love to see that service charges are treated like tips. The IRC has advocated for an act—I think it’s called the Fairness in Taxing Service Charges. Basically, if you’re a restaurant that charges service charges, you can opt into it. This is not mandatory. If you want to stay with your tipping structure, fine. Everybody should have the ability to decide what kind of restaurant they want to run. But if you want to have a service charge, then you can’t charge more than 25 percent, and 100 percent has to go to payroll, and it would not be considered taxable income if you do that. It would basically mirror the tip credit.
Service charges would be the same way as tips—not taxed as income, because they’re passed through. It would eliminate that weird tip thing where, if you want to remove that part of dining culture from your restaurant and pay everybody the same wage, whatever you want to do with your payroll is your business. In the same way that tips subsidize payroll for restaurants, service charges would subsidize payroll for restaurants. It’s a much bigger impact for a restaurant owner.
Why might a restaurant owner want to implement a service charge, as opposed to just increasing menu prices?
The reality is, people always say, “Just charge more. Pay your people well, just charge more.” But restaurants operate on somewhere between 4 percent and 6 percent profitability, if you’re lucky. If people paid what it really should cost to eat at a restaurant, we would not have as many diners. People would not be able to afford to eat out as much as they do, and we would not have as many restaurants as we do. That’s a simple fact.
Real estate prices have skyrocketed. Leases are high, rent is high, payroll is getting higher and higher. Food costs are crazy. We’ve got tariffs now on things that will impact any repairs or construction. Would you pay $45 for a plate of pasta, even if it’s handmade? You might, but would you do it three times a month?
That’s why the money evaporates once it comes in the door. When you get $1 in the front door, 96¢ goes out to the local economy—whether it’s your staff, rent, or the people you buy from. We buy a lot from local farmers, so I feel good about that, but it’s still not in my wallet. Insurance is $30,000 a year. People don’t really understand, because they think maybe we buy food for cheaper than they do at the grocery store. It’s just not true. We don’t have wholesale pricing for food. We pay just as much, sometimes more, for produce, milk, butter, eggs. When you feel it at the grocery store, we feel it as well.
Nobody wants to have a restaurant that’s perceived as unaffordable, but it’s the reality of the situation. A lot of us don’t pay ourselves for months before we decide to raise our menu prices. Unfortunately, the culture of restaurants and the economics of restaurants are long-established, and Americans don’t really want to pay for food. It’s part of our culture. I get it because it’s expensive—you’ve got to choose between your medication, health insurance, rent, groceries, and then luxury items. Americans are struggling, and we all want to have restaurants that are approachable.
What do you see as the good parts of the “No Tax on Tips” proposal that are worth preserving?
Anything that helps restaurant workers, I’m for. I think anything that helps shed light on the realities of restaurant economics is a good thing. People wouldn’t believe how hard it is to run a restaurant. People hear it, but they don’t really understand what that means. Nobody in their right mind would say this is a good business model. I’m in favor of having this conversation.
I’m in favor of lawmakers hopefully taking the time to learn more about the realities of our industry. I’m maybe stupidly optimistic that we could move the needle on this whole conversation a little bit.
Who do you see “No Tax on Tips” benefiting most?
A server who makes sub-minimum wage.
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