Many restaurants may need to rethink their mandatory gratuity policies if they want this income to count as qualified tips for their workers under the new tax laws.<\/p>\n
The “no tax on tips” provision in President Trump’s One Big Beautiful Bill Act allows certain workers to deduct up to $25,000 in “qualified tips” per year from 2025 through 2028. The rub is that mandatory gratuities, the 15% to 20% that restaurants often impose on parties of six people or more, aren’t eligible for the deduction, a disappointment to the restaurant and foodservice industry, which held out hope for a different outcome.<\/p>\n
The industry is the country’s second-largest private-sector employer, providing 15.7 million jobs, or 10% of the total U.S. workforce, according to a data brief from the National Restaurant Association based on the U.S. Census Bureau’s American Community Survey.<\/p>\n
Research from the National Restaurant Association shows that 54% of full-service operators \u2014 including 67% of fine-dining operators \u2014 say their restaurants sometimes add a service charge or automatic gratuity to customer checks. Among this group, 12% add the service charge or automatic gratuity to all checks, while 88% only add it to parties that exceed a specific number of people (typically six or more) or to banquets, private events or catering events.<\/p>\n
Notably, the Internal Revenue Service has never considered these service fees as tips. However, the restaurant industry hasn’t necessarily followed the letter of the law, according to Jean Hagan, a partner at Eisner Advisory Group who focuses on the restaurant industry.<\/p>\n
Hagan said during a recent webinar for a large state restaurant association, many proprietors were surprised to learn they weren’t supposed to be counting service fees as tips. “They’ve just always been doing it a certain way \u2014 passing on the service fees to employees as a tip,” Hagan said.<\/p>\n
Some advocates for the restaurant industry have been lobbying to change the way service fees are treated. They’d like to see automatic gratuities included as tips. The Culinary Union in Nevada, for example, submitted formal recommendations to the U.S. Department of the Treasury and the IRS that automatic gratuities and suggested tips both be treated as eligible tip income.<\/p>\n
However, upending the long-standing distinction between service fees and tips doesn’t appear likely. In September, the IRS issued proposed rules on the new “no tax on tips” deduction. The rules aren’t final yet, but there doesn’t seem to be a lot of wiggle room, since the language within the OBBBA is unambiguous \u2014 the tip has to be voluntary.<\/p>\n
Even though the regulations regarding these rules are not yet final, industry participants aren’t expecting much to change with respect to service fees and tip eligibility. At a hearing in October, the IRS reiterated that it is maintaining the stance that service fees aren’t eligible for the deduction, said Scott Klein, senior manager of tax policy and advocacy for the American Institute of CPAs, who attended the hearing.<\/p>\n
Some restaurants are taking a wait-and-see approach. “Restaurant operators are watching closely for the final ‘No Tax on Tips’ rules from the IRS and will evaluate any shift in their restaurant’s current policies on tipping so that it best suits their tipped employees’ desires,” Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, wrote in an email.<\/p>\n
Some business owners may decide to make changes for competitive reasons. “For restaurants who use the commission-based model or utilize service charges, those servers would likely consider it a disadvantage to forego $25,000 of tax-free income when they could potentially move to a restaurant that does not utilize service charges and are therefore eligible for tax-free tips up to $25,000,” said a spokesperson for The Florida Restaurant and Lodging Association.<\/p>\n
If you’re a restaurant owner or employee, it’s essential to understand the new tax laws and how they affect your business and income, and to consult with a tax professional to ensure you’re in compliance and taking advantage of the available deductions. You can find more information on the new tax laws and their impact on the restaurant industry Here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Restaurant Industry Faces Challenges with Mandatory Gratuity Policies Under New Tax Laws Many restaurants may need to rethink their mandatory gratuity policies if they want this income to count as qualified tips for their workers under the new tax laws. The “no tax on tips” provision in President Trump’s One Big Beautiful Bill Act allows […]<\/p>\n","protected":false},"author":1,"featured_media":667,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/image.cnbcfm.com\/api\/v1\/image\/108223267-1762550121572-gettyimages-2158018292-axm--mc-whcs-088.jpeg?v=1762550145&w=1920&h=1080","fifu_image_alt":"","footnotes":""},"categories":[24],"tags":[],"class_list":{"0":"post-666","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-small-business"},"_links":{"self":[{"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/posts\/666","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/comments?post=666"}],"version-history":[{"count":1,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/posts\/666\/revisions"}],"predecessor-version":[{"id":668,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/posts\/666\/revisions\/668"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/media\/667"}],"wp:attachment":[{"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/media?parent=666"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/categories?post=666"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sosahustle.com\/blog\/wp-json\/wp\/v2\/tags?post=666"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}