Law360 included Michael Chittenden’s remarks about the IRS’ preliminary guidance implementing a tax deduction for tip income, in accordance with the GOP budget law.
The specific types of workers who would qualify for the tax break include dishwashers, cooks, performers, coatroom attendants, house cleaners and electricians. Digital content creators, such as streamers, online video creators, social media influencers and podcasters, are also eligible for the deduction.
Taxpayers will need clarification, Michael on a provision in the rules that says tips don't qualify for the deduction if they're received in the course of a specified service trade or business defined under Internal Revenue Code Section 199A, which outlines the qualified business income deduction.
The distinction could result in unequal treatment of people in similar jobs, Michael noted, pointing to the potential for self-employed performing artists to be barred from the tax break.
For example, a self-employed pianist who is contracted to play at a hotel bar and receives tips presumably wouldn't be eligible for the deduction because they're in a specified service trade or business, Michael observed. However, a pianist employed by a hotel and scheduled for shifts would be eligible for the deduction because the hotel is not in a specified service trade or business, he said.
"That's sort of an odd result if you think about it," he noted.
The government will also need to release guidance about withholding changes employers will be required to adhere to, which is an urgent goal as the end of the year approaches, Michael said.
One major clarification the agency will have to produce is how to address withholding taxes in the case of joint filing, since the deduction's $25,000 cap applies to a single return instead of being applied per person. It's a "fairly significant marriage penalty" and one that "makes the withholding changes more difficult," Michael stated.
"I'm very interested to see how the withholding changes will be implemented in the absence of a new W-4 because of things like the shared cap on deductions, because that is something that is not reflected on the current W-4," he observed.
The IRS is likely working with payroll companies to make changes, but many large companies, including restaurant companies, have custom-designed payroll systems, Michael continued.
"We're really getting down to the wire on withholding guidance for next year, and so I do hope that we'll see withholding guidance very soon," Michael commented.
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