The new “no tax on tips” law could push many restaurants to reconsider their mandatory gratuity policies if they want qualified tips for employees under Trump’s latest tax regulations.
Under Trump’s One Big Beautiful Bill Act, certain workers can deduct up to $25,000 in “qualified tips” per year from 2025 through 2028. However, this may pose a challenge for the restaurant and food service industry, as mandatory gratuities of 15% to 20%—commonly applied to parties of six or more—do not qualify for the deduction, CNBC reported.
Under the new policy, restaurants must process all tips through payroll, even if they hadn’t done so previously or had been incorrectly including service fees, so employees can take advantage of the deduction. This will increase pressure on restaurants to handle tips correctly. Jean Hagan of Eisner Advisory Group, which specializes in the restaurant industry, noted during a recent webinar for a major state restaurant association that many owners were surprised to learn that service fees should not be counted as tips.
“They’ve just always been doing it a certain way — passing on the service fees to employees as a tip,” Hagan said.
But under the OBBBA, that will now be required to change.
“They’ve got to clean their systems up and follow the law as it’s always been,” Hagan said. “If they don’t, the employee won’t get the full benefit of the new tax law.”
Changing the long-standing distinction between service fees and tips seems unlikely, despite efforts by restaurant advocates lobbying for a shift in how fees are treated. In September, the IRS issued proposed rules for the new “no tax on tips” deduction. While the rules are not yet final, there appears to be little flexibility, as the language in the OBBBA is clear: only voluntary tips qualify.
“Congressional intent is pretty clear,” said Andrew Lautz, director of tax policy for the Bipartisan Policy Center. “What’s unclear is how restaurants respond to that.”
The clock is ticking as restaurant owners and employees consider their options. With Trump’s OBBBA still new and the IRS finalizing regulations, restaurants and other businesses face a complex situation for employees seeking deductions in 2025.
The AICPA had requested that the Treasury Department and IRS provide a safe harbor for the 2025 tax year, which the IRS issued in early November. Under this guidance, employers will not face penalties for failing to separately account for amounts reasonably designated as cash tips or for the employee receiving them.
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