Trump’s ‘No Tax on Tips’ Policy Impacts Restaurants

A new tax policy introduced by President Trump, dubbed the ‘no tax on tips’ law, is poised to create significant shifts within the restaurant industry. This regulation, part of the ‘One Big Beautiful Bill Act’ (OBBBA), could compel restaurants to rethink their long-standing practices regarding mandatory service fees, especially for larger parties, to ensure employees can benefit from the new tax deductions.

The ‘Qualified Tips’ Deduction Challenge

Starting in 2025, certain workers will be able to deduct up to $25,000 in ‘qualified tips’ annually through 2028. However, a key challenge arises because mandatory gratuities, typically applied to parties of six or more and often ranging from 15% to 20%, do not qualify for this deduction, according to CNBC. This distinction puts pressure on restaurants to process tips correctly through payroll so employees can fully leverage the new tax law.

Jean Hagan of Eisner Advisory Group, a firm specializing in the restaurant sector, highlighted during a recent webinar that many owners were surprised to learn that mandatory service fees should not be classified as tips. “They’ve just always been doing it a certain way — passing on the service fees to employees as a tip,” Hagan noted. The OBBBA now requires a change in this practice.

Navigating New Regulations

The IRS issued proposed rules in September regarding the ‘no tax on tips’ deduction, and the language in the OBBBA appears quite clear: only voluntary tips qualify. Andrew Lautz, director of tax policy for the Bipartisan Policy Center, commented, “Congressional intent is pretty clear. What’s unclear is how restaurants respond to that.” This leaves restaurant owners and employees in a complex situation as they consider their options before the 2025 tax year.

While restaurant advocates have lobbied for a change in how service fees are treated, it seems unlikely that the distinction between service fees and voluntary tips will shift. To provide some relief, the IRS issued guidance in early November offering a safe harbor for the 2025 tax year. This means employers won’t face penalties for failing to separately account for amounts reasonably designated as cash tips or for the employee receiving them, offering a temporary buffer as businesses adjust.