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No Tax on Tips

Fri, 25 Jul 2025 18:13:18 GMT

No Tax on Tips!

Subject: No Tax on Tips Law – What Restaurants Must Do Now

We’re reaching out with important information on a major change from the recently passed One Big Beautiful Bill Act (OBBBA). A central provision—referred to as the “No Tax on Tips” Law—excludes tip income from federal income tax for eligible restaurant employees starting January 1, 2026.

This is great news for your staff—and a strategic opportunity for your business. Here’s what you need to know.

�� What the New Law Does

Beginning in 2026, voluntary customer tips of up to $25,000 will no longer be subject to federal income tax. However, Social Security and Medicare taxes (FICA) still apply. The IRS will release an official list of qualifying tipped occupations by late 2025. Early indicators suggest most front-of-house employees will be eligible.

✅ What Qualifies as a Tip (and What Doesn’t)

It is critical to distinguish tips (which are tax-free under the new law) from service charges (which are not):

Tips – Tax-Free in 2026

Left voluntarily by customer

Cash or card tips given directly to employees

Customer decides amount and payment

Tip pooling or sharing among FOH staff

Service Charges – Taxable as Wages

Mandatory charges added to bills

Auto-gratuity or banquet service fees

No discretion by customer

Revenue retained or redistributed by employer

�� Rule of Thumb: If the customer has a choice, it’s a tip. If it’s mandatory, it’s a service charge.

�� FICA Taxes Still Apply — And the Tip Credit Is Still Available

Even though tip income will be excluded from federal income tax, it must still be reported for FICA purposes (Social Security and Medicare). Both you and your employees will continue to owe FICA taxes on tips earned.

✴️ But here’s the benefit for owners:

The FICA Tip Credit remains fully in place under OBBBA. This powerful credit allows you to claim a dollar-for-dollar credit on your income tax return for the employer portion of FICA taxes paid on tips above the federal minimum wage.

For many restaurants, this credit can result in thousands to tens of thousands of dollars in annual savings. It’s one of the most valuable employer credits in the hospitality industry—and it’s not going away under this new law.

�� Action Steps to Take Now

Continue Tip Reporting Through 2025
Report all tips as taxable income until 12/31/25.
Coordinate with Payroll
Update payroll systems to separate income-taxable wages and FICA-reportable tips.
Train Managers and Educate Staff
Staff must still report all tips for FICA. We'll help you make sure they understand the distinction.
Track Service Charges Separately
Avoid misclassification of taxable income as tax-free tips.
Plan to Claim the FICA Tip Credit
Ensure you maintain proper tip reporting and payroll records to claim this benefit.

�� Implementation Timeline

Date

Action

Now – Dec 2025

Continue full income and FICA reporting of tips

Q4 2025

IRS to release qualifying occupation list

Jan 1, 2026

Tips exempt from income tax; FICA tip reporting and FICA Tip Credit remain

Restaurant overtime Under the One Big Beautiful Bill Act

Thu, 17 Jul 2025 16:45:53 GMT

Overtime Pay for Restaurants Under the OBBBA

The One Big Beautiful Bill Act (OBBBA) was si gned into law on July 4, 2025 —and it directly affects your restaurant’s payroll policies. This federal legislation includes a temporary federal income tax exclusion for qualifying overtime pay , which applies retroactively to January 1, 2025 , and remains effective through December 31, 2028 .

�� Federal Income Tax Exclusion for Overtime Pay – What Qualifies?

Under OBBBA, only the federally mandated overtime premium portion —the extra compensation paid for hours worked beyond 40 per week under the Fair Labor Standards Act (FLSA) —is excluded from federal income tax. This typically refers to:

Time-and-a-half pay (1.5× the regular rate) for hours worked over 40 in a workweek.

Important: What Counts — and What Doesn’t

Regular hourly wages

❌ No

Regular earnings are still fully taxable

FLSA-mandated overtime (1.5×)

✅ Yes

This is the core amount the law targets

Double time (2×)

⚠️ Partially

Only up to the 1.5× portion qualifies; the extra 0.5× is taxable

State or contractual OT

❌ No

Additional OT pay required by state law or employer policy is taxed.

In summary, only the 1.5× premium portion required by FLSA is exempt from federal income tax. If your business pays double time for holidays or extended hours (2.0× regular rate), only the first 1.5× above the regular rate qualifies , and the remainder is treated as fully taxable income. In regards to State-Specific or Employer-Defined Overtime, if your restaurant provides overtime pay not required by federal law (e.g., overtime for shifts longer than 8 hours, double time on Sundays, etc.), that portion is not excluded from federal income tax under this provision.

�� Payroll Reporting Implications

Employers must separately track and report qualifying overtime premiums on Form W-2 , beginning in tax year 2025 . For this initial year, the IRS will allow employers to use reasonable estimates if their payroll system did not break out the overtime premium portion beginning January 1.

We recommend:

Verifying your payroll system can distinguish the FLSA overtime premium (e.g., the 1.5×) from base pay and any additional bonuses or premium pay.
Separately classifying state-mandated or policy-based double time so it is not inadvertently reported as tax-exempt.
If you use restaurant-focused payroll software or a third-party processor, we strongly recommend verifying that these updates are being incorporated correctly.

�� Action Steps for Restaurant Owners & Managers

Task

Review time-tracking practices

To ensure overtime premiums are correctly split from base wages

Audit payroll system configurations

Most systems do not currently break out the 0.5× FLSA premium

Educate management & payroll team

Shift leads and GMs need to understand the tax impact of how hours are scheduled

Prepare to update W-2 reporting

Employers are responsible for providing accurate breakdowns starting 2025

�� We're Here to Help

We are monitoring IRS guidance closely and will notify you once the agency releases additional details. In the meantime, we are available to assist with:

Reviewing your overtime policies for compliance
Configuring your payroll system for new reporting requirements
Planning year-end W-2 adjustments or corrections if needed
Drafting communications to employees about how these changes affect their pay

Please use our contact us page if you’d like to set up a consultation.