There is suddenly a fair amount of discussion about not collecting taxes on tips. The British Broadcasting Corporation (BBC) reports that "no tax on tips" idea is enjoying some favor in various discussions. The financial implications are not clear in any perspective because it depends on what the meaning of the word "no" is.
From the standpoint of the government, any alleviation of tax burden will result in less government income. Every dollar the government spends, it takes from someone first. The BBC notes that about "4 million workers regularly receive tips – less than 3% of the overall workforce." Thus, the affected population is seemingly small. And, it notes, "a significant share of those workers – about 37% - earn so little that they do not currently pay income taxes to the federal government at all."
Years ago, the news excoriated someone for claiming that close to half of Americans don't pay income taxes, as reported by ABC News in 2012. The statement was factually accurate, but some interpreted it to mean that 47% pay no taxes. Some were quick to publish their rebuttal to the "47%," and a recurrent theme of that was essentially that while they pay no income tax to support the operation of our federal government and its burdens, they do pay "payroll taxes," see Five Myths, Urban Institute.
In the current discussion, there is some curiosity as to what "no" means. There are sometimes "nos" that mean "some." The question seems to be whether "no tax" in this context means no income tax, or whether it means "no tax." There is more to the "tax" category than federal income tax. In some states, there is a state income tax. In all states, there is the share for your lifelong partner - FICA - the "Federal Insurance Contribution Act," a euphemism for social security and Medicare taxes. You can call them "contributions," but many call these "payroll taxes," which some might quibble with.
Nonetheless, it is more likely that an individual would pay "payroll taxes" regardless of income level. In order to be mandatorily liable to "contribute" to the expenses of the national government through income taxes, higher earnings are necessary. In terms of national defense, federal services, and more, a significant portion of the wage earners contribute nothing. Of course, anyone is welcome to "contribute" more at any time. Dollars are seemingly always welcome.
I can hear the two old guys up in the balcony (Statler and Waldorf) "isn't this blog about workers' compensation?" or "what do taxes have to do with workers' compensation?" Ok, good point. But, the answer is that perhaps tax definitions have a significant impact on workers' compensation and are worth considering.
Back in the day, the world of workers' compensation began providing "indemnity" benefits to workers injured on the job. The rub was how those would be calculated. The ultimate answer was an "average weekly wage" (AWW). The point was to add together some period of wages and divide for an average. This averaging was intended to smooth over potential peaks and valleys in someone's recent earning history so that the calculation was not based on some figure that was coincidental and fortuitous to one party or the other.
And, whether we believe it or not, there were some who perceived that some workers did not report all their earnings regularly, nor paid the tax man on them. These were seen as intentionally underreporting income, but in fact such could have been inadvertent mistakes or could have stemmed from challenges with the burdens of self-record keeping and self-reporting. However, those same perceivers felt that such workers were apt to nevertheless seek workers' compensation on all of their earnings following an accident.
In some instances, that led to disputes over the appropriate AWW for a particular worker. Some would jump to "it's not fair for the worker to receive less than a full measure of what was actually earned." However, it is important in this regard that the insurance company collects the premiums in workers' compensation insurance using the "payroll." Thus, how much a company pays a worker (or how much an employee earns) is wrapped up in the premium paid for the insurance.
In that regard, this insurance is perhaps not much different than car insurance. The benefit (replacing a car) in the event of a loss is more expensive for a brand-new Bentley than for a twelve-year-old rust bucket. So, insuring the Bentley costs more - a higher premium. In the same way, workers' compensation insurance is more costly for a high-payroll employee than for one with a moderate or lower payroll. That is all ameliorated some by the "maximum compensation rate," but that is a discussion for another day.
So, real or not, the perception was of the potential for underreported income. The Florida Legislature amended section 440.02, Fla. Stat., the definition of "Wages" as in "average weekly wage":
"(40) “Wages” means the money rate at which the service rendered is recompensed under the contract of hiring in force at the time of the injury and includes only the wages earned and reported for federal income tax purposes on the job where the employee is injured and any other concurrent employment where he or she is also subject to workers’ compensation coverage and benefits, together with the reasonable value of housing furnished to the employee by the employer which is the permanent year-round residence of the employee, and gratuities to the extent reported to the employer in writing as taxable income received in the course of employment from others than the employer and employer contributions for health insurance for the employee or the employee’s dependents." (Emphasis added).
Thus, if an employee wants benefits post-injury that are based on all earnings, including tips, "gratuities" are limited to those "reported to the employer as taxable income received ..." Well, if "no" means "no?" That does not mean, as is too often overstated, that wages are limited to earnings that taxes are paid on. Earnings may be reported and yet not rise to the level on which income taxes are due. But that is not necessarily the end of the analysis.
The question about what "no" may mean thus comes into focus. If, as Mom always said, "no means no," then perhaps gratuities will no longer be reported to any employer by any employee "as taxable income received." If tips are no longer "taxable" income for any purpose, the employer may not care to have that information. Logistically, collection and documentation perhaps take time (perhaps somewhat less so in the modern day of apps, touch screens, etc.).
If an employee is not liable for any taxes on tips, will that be different? If tips are no longer "taxable income," perhaps the federal government quits asking for the tip information, and employers quit collecting it? But, what if "no" means "some," as in "payroll taxes?" Will the federal government insist on reporting of gratuities then? If exempt from "payroll taxes," that will decrease the employee's "contribution," and may impact her or his future Social Security benefits. Some perceive such benefits as inadequate in their present calculation, and so a decrease may be undesirable.
In the event that the government does not require reporting, will the provisions of section 440.02(40) matter? If reporting changes, that could possibly alter the operation of this law. If the definition of "income" changes, that could have an impact as well.
But, would the effect be to change the "wages" or the premium for that matter? Would there be any amendment to this Florida statute for clarity on the impact of such a "no" tax federal outcome? This is a topic that may receive some debate in Florida. And, it is noteworthy that such concerns and questions may be addressed in other states differently. Workers' compensation, after all, is a state law program.
The questions are intriguing and as yet academic. Everyone knows that many proposals or ideas can be discussed and debated. The laws we live with, however, require successful trips through the legislative process and then Executive approval. Thus, the point may be better addressed one day in the future after such a "no tax" bill is drafted, passed, and signed. The implications may be clearer when there is a definition of what "no" means.
Until then, the "no" tax is interesting. The questions about what such a law might do to change workers' compensation are easily answered - "it depends." And, until the details are defined, the answer will remain a curiosity.
