How Will the No Tax on Tips Act Impact Restaurant and Service Workers?

Restaurant and service workers all over the U.S. may see a welcome boost to their take home pay because of the “No Tax on Tips” provision in the GOP’s “One Big Beautiful Bill,” recently signed into law. The policy provides a deduction for tipped workers for up to $25,000 in tips from their federally taxable income and depending on the amount of income they earn, this could mean thousands of dollars in tax savings every year.

Who Qualifies for the Tip Deduction?

This deduction applies to tips freely given, not simply inflexible service charges imposed by employers. Employees must possess a valid Social Security number by tax filing due date and the deduction is gradually phased out if a single or married taxpayer has over $150,000 of earned income or over $300,000 for married taxpayers. The deduction is available for the years of 2025 through 2028. You still have to pay state, local and payroll taxes including contributions to Social Security and Medicare.

The IRS and the Treasury are now making the rules to determine exactly which job positions will qualify. Most restaurant servers, bartenders and hospitality employees are currently expected to benefit but clarity will come soon.

Will This Create Inequality Among Workers?

There are some experts who believe the law could spark fight between employees. For example, restaurant workers who receive tips might pay significantly less in federal tax than someone who makes the same amount of money in retail work. Critics also worry that it could create disadvantages for people who cannot work in tipped positions such as caregivers or people with fixed schedules.

What Does It Mean for Employers?

Businesses might be required to change their reporting of tipped income and this could complicate payroll systems. Some are concerned that some employers will not increase base wages, simply distributing more in tipped income. On the other hand, some see this as a tool to recruit additional workers to the service sector.

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