11/09/2025
Attn: clients and friends who own or manage restaurants :
The “No Tax on Tips” provision in the One Big Beautiful Bill Act of 2025 is now law. It provides real relief for servers and other tipped employees by allowing a federal income tax deduction for qualified voluntary tips. However, mandatory gratuities or service charges do not count as tips under the law. They continue to be treated as wages, which means they remain fully taxable for both income tax and payroll tax purposes.
That distinction is important. If your restaurant keeps using mandatory gratuities, such as an automatic percentage added to large parties, those amounts will not qualify for the tax-free treatment. Your employees could lose the benefit, while servers at other restaurants who rely on voluntary tipping will see higher take-home pay. Over time, that could make your business less attractive to workers who know they can earn income that qualifies for this new tax deduction elsewhere.
It may be helpful to talk with your team about this change. Let them know you are considering ending mandatory gratuities so they can fully benefit from the new law. Presenting it as a decision made in their best interest can strengthen trust and morale. Guests are still free to tip generously, and now those tips will go further since they may reduce the server’s federal income tax.
If you are concerned about fairness or consistency for large groups, train staff to explain the tipping policy clearly. Most guests will understand once they know tips are voluntary but now eligible for special tax treatment. Some may even tip more generously when they realize the money goes directly to the worker without added taxes.
Mandatory gratuities are now a disadvantage for your staff, while voluntary tips have become an opportunity. Framing the change as a way to protect your employees’ income can help build loyalty and goodwill.
There is also a benefit for you as the owner. Because mandatory gratuities are classified as wages, they increase payroll taxes and require additional reporting. By eliminating them, you can reduce the amount of income processed through payroll, lower your share of employment taxes, and simplify compliance. Moving to voluntary tips helps your staff and may also save your business money.
One final note: the deduction applies only to qualified voluntary tips up to $25,000 per employee per year, and it phases out once an employee’s income exceeds $150,000 for single filers or $300,000 for married couples filing jointly. The deduction applies only to federal income tax, not to Social Security or Medicare taxes. Be sure your team understands these limits so they can plan realistically.