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The Corner Economy

The Fee on the Tip

A tip used to be something you could get arrested for. Now it's something the shop pays a card fee on, and since 2026 the tip screen also decides part of the worker's tax break.

Tess and Ray · 22 min · 13 Oct 2026

FactUnion VerifiedEvery fact on the episode's fact sheet was checked against its sources. Wrong facts were corrected. What this meansFacts checked 13 Oct 2026

Chapters (9)

About this episode

In 1910s Iowa, a barber could be arrested for taking a quarter tip. Today nobody goes to jail for tipping. But when a client taps a tip on a card reader, the shop pays a percentage on that tip and on the sales tax too, money that was never the shop's. Tess and Ray follow that fee from the tap to the deposit. Along the way: Illinois's one-of-a-kind ban on fees on tips and tax, now stuck in federal court; the state rules on whether an owner can take the fee out of a worker's tips; and the 2026 IRS rules that turned the tip screen into a tax record.

They also give both sides of the argument, including bank and think-tank critics who say bans like this mostly help big retailers. Then they end on two things to look at on Monday: your processor statement and your own tip screen. This is general information, not legal or tax advice.

Hosted by Tess and Ray, performed by synthetic voices. Supported by Lynqly.

Facts and sources

Every fact used in this episode, with the sources it was checked against. Download as data

176 of 176 recorded lines matched the checked script.

  1. As of October 2026, the Illinois Interchange Fee Prohibition Act has not taken effect, and its implementation is delayed until July 1, 2027.

  2. On September 22, 2026, U.S. District Judge Virginia Kendall extended the permanent injunction against the Illinois law to federal credit unions.

  3. The injunction now protects national banks, federal savings associations, federal credit unions, out-of-state state-chartered banks and payment card networks, leaving the law applicable only to state-chartered credit unions and Illinois-chartered institutions.

  4. NACS reported on October 12, 2026 that Illinois Attorney General Kwame Raoul has filed an appeal to protect the state law limiting swipe fees.

  5. The plaintiffs suing Attorney General Raoul over the Illinois law are the Illinois Bankers Association, the American Bankers Association, America’s Credit Unions and the Illinois Credit Union League.

    Reworded to match its sources. Source corrected: the page first cited does not state this; the sources listed do.

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  1. The Illinois Retail Merchants Association pushed the Interchange Fee Prohibition Act, passed in the final days of the May 2024 legislative session, to offset a cap on the discount retailers receive for collecting sales tax.

  2. In a December 20, 2024 opinion, Judge Kendall granted the bankers’ motion for a preliminary injunction against the Illinois law in part.

  3. Analysts in September 2026 advised Illinois merchants not to budget for savings or buy compliance products, because the law’s reach depends on charter-type distinctions that current payment infrastructure is not designed to handle.

    Reworded to match its sources. Source corrected: the page first cited does not state this; the sources listed do.

  4. Visa and Mastercard calculate interchange, network assessments and processor markups on the full captured total, including the gratuity, with no carve-out for tips.

  5. For U.S. merchants in restaurant categories MCC 5811, 5812 and 5814, Visa’s tip tolerance is 30 percent above the authorized amount as of February 21, 2026.

  6. Exceeding the tip tolerance without an incremental authorization can downgrade a transaction, typically adding 0.30 to 0.50 percent in costs.

  7. According to the cited chart, hair salons (MCC 7230) have a Mastercard tip tolerance of 25 percent but a Visa tolerance of 0 percent, so Visa transactions adjusted for a tip after authorization downgrade to a non-qualified rate.

    Reworded to match its sources. The claim says salons have no standard tolerance, but the source gives Mastercard a 25 percent tolerance for MCC 7230 and gives only Visa 0 percent.

  8. The Electronic Payments Coalition estimated that Illinois merchants would save $118 million a year in interchange fees under the law, in a 2024 report arguing the law creates a windfall for the largest retailers.

  9. A Common Sense Institute analysis estimated that Colorado merchants paid about $110.5 million in interchange fees on sales tax and tips combined in 2023.

  10. ICLE’s October 2026 brief argues that the proposed Visa-Mastercard antitrust settlement would reduce interchange fees nationwide and shrink the savings from state carve-outs for taxes and tips, making those carve-outs redundant and more harmful.

    Reworded to match its sources. The settlement is only proposed and has preliminary approval, so ICLE says it would provide fee relief, not that it already does.

  11. CEI’s written testimony urges rejection of Massachusetts Bill S.688, a state bill that would prohibit interchange fees on the sales tax and gratuity portions of card transactions, arguing it would primarily benefit the largest retailers.

    Reworded to match its sources. S.688 is a Massachusetts state bill, not a federal bill.

  12. CEI argues that after the Durbin debit cap, banks offset lost revenue by sharply reducing the availability of free checking (from about 60 percent to about 20 percent of covered banks), nearly doubling monthly fees and tripling minimum balance thresholds, while most consumers did not see merchant savings passed on to them.

    Reworded to match its sources. The CEI page says banks reduced the availability of free checking rather than eliminating it; the rest of the claim matches.

  13. Under the federal FLSA, an employer may deduct a card processing fee from credit-card tips only up to the actual fee the card company charged, may use a blended or average figure only if it does not exceed that actual charge, and may not cut pay below minimum wage.

    Reworded to match its sources. Federal guidance does not ban rounded or estimated figures outright; it allows a blended or average figure as long as it does not exceed the actual charge.

  14. As of October 2026, California, Delaware, Maine, Massachusetts, Minnesota and New Jersey prohibit employers from deducting card processing fees from employee tips, while Illinois, New York and Washington permit a proportional deduction.

  15. Law firm Clark Hill notes that Pennsylvania also prohibits deducting credit card costs from employee tips.

  16. The One Big Beautiful Bill Act gives a federal income tax deduction for qualified tips in customarily tipped occupations from 2025 through 2028, capped at $25,000 a year.

  17. On April 10, 2026, Treasury and the IRS issued final regulations listing more than 70 occupations eligible for the tips deduction, including barbers, hair stylists, nail technicians and baristas.

  18. Under the final rules, a point-of-sale system must offer a zero-tip option for a tip to be qualified; if the system forces a minimum tip, only the amount above that minimum qualifies.

  19. Self-employed booth renters can claim the tips deduction, but it is limited to their business’s net income and does not reduce self-employment tax.

  20. A 2026 ChairHold report estimates that about 71% of licensed U.S. cosmetologists, barbers and nail techs worked as booth renters or independent contractors in 2026, up from about 58% in 2019, as salon suite locations grew from about 9,000 to 15,000.

    Reworded to match its sources. ChairHold calls these figures estimates it built from license data, salon suite operator reports and survey responses, so they are not the results of an industry survey. The numbers themselves match.

  21. The National Restaurant Association reports that restaurant total expenses rose 36% since 2019, and a 2026 analysis of its data notes that 42% of operators were unprofitable in 2025.

  22. Between 1909 and 1915, six states (Washington, Arkansas, Iowa, Mississippi, South Carolina and Tennessee) passed laws against giving or soliciting tips, and all were repealed or struck down by 1926.

  23. Washington’s anti-tipping law, the first in the nation, took effect at midnight on June 8, 1909.

  24. In his 1916 book The Itching Palm, William R. Scott argued that tipping allowed employers to pay substandard wages by shifting labor costs to customers.

  25. In Dunahoo v. Huber (1919), the Iowa Supreme Court struck down the state’s anti-tipping law in a case brought by Sioux City barber T.J. Donahoo, who had been arrested after accepting a 25-cent tip, ruling that the law arbitrarily barred employees but not business owners from taking tips.

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