Tipping is also used to help the worker avoid paying taxes, since many service workers don't report 100% of their tip income as required.

And although companies would be able to deduct salary expense to reduce their own tax bill, they still benefit from the tipping scheme. If the worker receives, say, $10 in tips, the company would have to pay them $15-$20 to give them the same after-tax income, since a large portion of the wages would go towards income tax and social security. So, if the worker makes the same take-home pay through tipping rather than wages, the company and the customer both pay less! The real cost is borne by the taxpayer, who has to pay higher taxes elsewhere to make up for the loss.