Restaurants are reassessing their mandatory gratuity policies following new tax laws that affect how tips are classified and deducted.
Restaurants across the United States may need to reevaluate their mandatory gratuity policies in light of recent tax legislation that impacts how tips are classified for workers. The new “no tax on tips” provision, part of President Donald Trump’s One Big Beautiful Bill act, allows certain employees to deduct up to $25,000 in “qualified tips” annually from 2025 through 2028.
However, the law specifies that mandatory gratuities—typically the 15% to 20% service charges imposed on parties of six or more—do not qualify for this deduction. This has left many in the restaurant and food service industry disappointed, as they had hoped for a more favorable outcome regarding the treatment of automatic gratuities.
Advocates for the restaurant industry are actively lobbying for a change to this policy. The Culinary Union in Nevada has submitted formal recommendations to the U.S. Department of the Treasury and the IRS, arguing that both automatic gratuities and suggested tips should be recognized as eligible tip income. Additionally, several members of Congress from Nevada have reached out to Treasury Secretary Scott Bessent, urging him to ensure that automatic gratuities are classified as deductible tips.
In a letter dated August 12, lawmakers emphasized that there is no functional difference between auto-gratuities and voluntary tips for employees. They argued that including this income as eligible would prevent arbitrary distinctions that could disadvantage workers based solely on their employer’s business model.
Despite these efforts, it appears unlikely that the IRS will alter the distinction between service fees and tips. In September, the IRS proposed rules regarding the “no tax on tips” deduction, and while these rules are not yet finalized, the language suggests that tips must be voluntary to qualify.
“Congressional intent is pretty clear,” stated Andrew Lautz, director of tax policy for the Bipartisan Policy Center. “What’s unclear is how restaurants will respond to that.”
Many restaurant operators are taking a cautious approach, opting to wait for the final IRS rules on the “No Tax on Tips” policy before making any changes to their current tipping practices. Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, noted in an email that restaurant operators are closely monitoring the situation to determine how best to align their policies with the desires of their tipped employees.
“These employees have chosen a restaurant job because of the income potential they get from tipping, so operators want to ensure they can fully benefit from the tax credit while it is available,” Kennedy added.
A spokesperson for the Texas Restaurant Association indicated that some establishments are consulting with accountants and point-of-sale providers to identify the most effective strategies for their businesses and employees.
Additionally, competitive pressures may drive some business owners to adjust their policies. A representative from The Florida Restaurant and Lodging Association highlighted that servers at restaurants using commission-based models or service charges might view it as a disadvantage to miss out on the opportunity for $25,000 in tax-free income. This could lead them to seek employment at establishments that do not impose service charges and thus allow for tax-free tips.
As the restaurant industry navigates these changes, the impact of the “no tax on tips” law will likely continue to shape tipping practices and policies across the country.
Source: Original article