Olga Yastremska, New Africa, Afr
There is a lot going on in Washington, D.C., these days — and besides the impact of the ongoing shutdown, one issue that will impact restaurants directly is the "No Taxes on Tips and Overtime" provision of the new tax law signed in July 2025 that promises to reduce the federal income taxes for tipped workers. While the legislation offers an above-the-line deduction for the first $25,000 in tips (which means employees can reduce their taxable income by that amount), many questions remain about how the provision actually will be implemented.
To help clear up confusion, The Department of Treasury has released proposed guidance outlining who will be eligible for the $25,000 No Tax on Tips credit and what kind of tips qualify toward the credit.
According to information from the Texas Restaurant Association (TRA), the following are key points that restaurants and their employees should understand when determining how “No Taxes on Tips and Overtime” will impact them:
- Restaurant workers are widely eligible for this deduction, but only if the income qualifies as a voluntary tip, not a mandatory service charge. That distinction is critical for operators managing large party fees and service models. Note that suggested tip amounts can work if the customer clearly has the opportunity to adjust the amount.
- Qualified tips must be voluntary, determined by the customer, and not dictated by employer policy.* Service charges, like automatic gratuities for large parties, do not qualify.
- Operators may need to rethink service fee practices to ensure workers benefit from the deduction. One example: A customer subtracts 3% from a recommended 18% tip, paying 15% voluntarily. Because the customer could vary the recommended amount, this payment qualifies as a tip, not a service charge, information from the TRA says.
It also means that service charges like an automatic 20 percent tip charge for large groups will not qualify for the no taxes “perk” — which means restaurants could have to change policies on automatic tip fees.
To help navigate the changes ahead, the National Restaurant Association has scheduled an October 15 webinar “New Rules for No Tax on Tips & No Tax on Overtime Premium Pay.” To register, click here.
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