Despite disagreeing on most issues, former President Donald Trump and Vice President Kamala Harris have both recently come out in favor of eliminating taxes on tips for workers. KDA Inc. Founder and CEO Karla Dennis joins Wealth! to discuss the potential policy and what it would mean for both employers and employees if implemented.
"Right now, employees that are in the service industry, they are taxed on their tips. The tips are included in their wages and they are going to pay federal and state income tax. And in addition to that, they're going to have Medicare tax and Social Security tax withheld from their wages," Dennis explains of the current tax policy. If this policy were to be eliminated, service industry workers would not have to withhold taxes from their tips, including federal, state, Social Security, and Medicare taxes.
While this change would leave these workers with more cash in their wallets, it's not all good news. Because both the employee and employer won't pay into Social Security or Medicare, employees will cash out less money later on:
"If they're not paying tax on those tips, they are lowering their overall earned income. Earned income is the income that is used later on to qualify to purchase a home. Earned income determines how much money you're making. There is going to be a big impact, and you're going to now have to reserve for your own retirement if you're not paying Social Security on those tips. So you certainly want to make sure that you are thinking ahead and saying to yourself, 'What am I going to do in the future when it comes time for me to retire? Where is that money going to come from to pay me?'"
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