Trump’s ‘no tax on tips’ forces restaurants to shift service charges to large groups

The new “no tax on tips” law could prompt many restaurants to reconsider their mandatory tipping policies if they want qualified tips for employees under Trump’s latest tax rules.

Under Trump’s One Big Beautiful Bill Act, certain employees can deduct up to $25,000 in “qualified tips” per year from 2025 through 2028. pose a challenge for the restaurant and food service industry, as mandatory gratuities of 15% to 20% – typically applied to parties of six or more people – are not eligible for the deduction, CNBC reported.

Under the new policy, restaurants must process all tips through payroll, even if they haven’t done so before or have incorrectly included service charges, so employees can take advantage of the deduction. This will increase pressure on restaurants to handle tips properly. Jean Hagan of the Eisner Advisory Group, which specializes in the restaurant industry, noted during a recent webinar for a major state restaurant association that many owners were surprised to learn that service charges should not be counted as tips.

“They’ve always done it a certain way: pass the service charge on to employees as a tip,” Hagan said.

But under the OBBBA, that will now have to change.

“They need to clean up their systems and follow the law as it has always been,” Hagan said. “If they don’t, the employee won’t get the full benefit of the new tax law.”

It seems unlikely that the long-standing distinction between service charges and tips will be changed, despite efforts by restaurant advocates who are lobbying for a change in the way fees are handled. In September, the IRS issued proposed rules for the new “no tax on tips” deduction. Although the rules are not yet final, there appears to be little flexibility as the language in the OBBBA is clear: only voluntary tips are eligible.

“Congress’s intentions are quite clear,” said Andrew Lautz, director of tax policy at the Bipartisan Policy Center. “What is unclear is how restaurants will respond to this.”

The clock is ticking as restaurant owners and employees consider their options. With Trump’s OBBBA still new and the IRS finalizing regulations, restaurants and other businesses face a complex situation for employees seeking deductions in 2025.

The AICPA had requested that the Treasury Department and the IRS provide a safe harbor for the 2025 tax year, which the IRS issued in early November. Under these guidelines, employers will not be subject to penalties for failing to account for amounts reasonably classified as tips separately or for the employee who receives them.

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