No Tax on Tips
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
