President Trump signed the mega tax-and-spending bill into law last week. Now details are emerging about what the No Tax on Tips and Overtime elements will mean for both employers and workers within the restaurant industry.
Attorneys say specific guidance from the federal government is expected within 90 days of the bill signing on July 4, so more detail is likely before early October.
Among those details will be clarity on which workers, specifically, will be eligible for the tax deduction. The law specifies the no-tax-on-tips benefit can only go to workers who are customarily in the line of service, for example. It seems very likely that will include the estimated 2 million restaurant servers and bartenders nationwide.
The tax relief for overtime, meanwhile, will impact non-exempt hourly workers more broadly, or an estimated 13 million people, according to the National Restaurant Association.
How these deductions will actually work is, frankly, complicated.
“It’s going to be a busy year for accountants and people preparing taxes,” said Alden Parker, co-chair of the Hospitality Industry Group for the law firm Fisher Phillips.
The tax benefit applies to tipped income and overtime already earned this year—since Jan. 1, 2025—and going forward.
But it’s also temporary. The benefits are scheduled to sunset at the end of 2028, though it’s possible they could be extended at that point, notes tax attorney Marvin Kirsner, a shareholder in the law firm Greenberg Traurig.
Here is their advice about what employers should expect.
No Tax on Tips
There are limits. Under the bill, the federal income tax deduction applies to the first $25,000 earned in tips, and it’s an “above-the-line” deduction, so people don’t need to itemize to get the benefit.
But the deduction starts to phase out for higher-income earners. Starting with single-filers who make $150,000 or more annually (or $300,000 for couples filing jointly), the deduction starts to phase out.
Not all taxes on tips are going away. The One Big Beautiful Bill, as it is named, only reduces federal income tax on tipped income. Workers and employers will still need to pay payroll taxes that go to Social Security and Medicare, for example.
And it’s not clear how state income taxes will be impacted. Kirsner said most states tie their income taxes to the federal system, but states make their own rules (some states don’t even have an income tax). It remains to be seen whether they will conform fully (or in part) with this legislation.
Workers must have a social security number to benefit. To be eligible for the deduction, workers must have a social security number. Those with a tax ID—which includes some non-resident aliens—are not eligible.
The deduction applies to all tips (with a caveat below). Tipped income paid in cash or by credit card qualifies for the deduction, Kirsner said. It also applies to tips earned through a tip-sharing program.
What’s not clear, however, is whether back-of-the-house workers could claim the deduction, Kirsner said. That’s because back-of- the-house-workers may not be considered among those customarily in the line of service, so employers may need to wait on guidance to answer that question.
Parker added that he expects to see more litigation over tip pooling as a result of the tax bill.
“We might see employees scrutinize tip pools more closely because there’s money at stake that they might not get charged taxes on,” he said. “I think more and more servers are going to see the enormous benefit they could get.”
But not all gratuities may qualify (The caveat). The deduction only applies to tips given “voluntarily.” That means a service charge or any automatic gratuity applied to larger groups or catered events would not be eligible for the deduction.
“The amount (of the tip) has to be determined by the payor,” said Kirsner. But that still leaves a gray area.
There could be situations the IRS might consider a tip ineligible if there’s an element of “negotiation,” he said.
A restaurant, for example, might add a suggested tip to the bill, allowing the guest to customize the amount or take it off. Would that be considered a negotiation? “We don’t know,” he said.
And a warning. The deduction, of course, applies only to tips reported as income. Workers who might “forget” to report cash tips for tax purposes should be aware the IRS will, no doubt, pay attention to shifts in reported tipped income after the No Tax on Tips benefit ends. If that tipped income suddenly drops or disappears, it could be a red flag.
No Tips on Overtime
Also limited. The deduction for overtime is limited to $12,500 for those filing as singles, and $25,000 for couples filing jointly. And, as with the No Tax on Tips element, it also phases out for those earning $150,000 or more (or $300,000 for couples).
The deduction only applies to overtime pay above the regular rate. Overtime pay is typically time and a half. So, in this case, the income eligible for the no-tax benefit is only the “half.”
For example, a worker who earns $20 per hour would earn $30 for overtime: $20 plus another $10 per hour. But the tax benefit would only apply to the $10.
And tipped income that is part of that overtime wage would not be eligible, of course, since that would be covered under No Tax on Tips, and people can't double dip.
Parker said the No Tax on Overtime rule is more likely to benefit back-of-the-house workers, who more routinely work overtime.
But there are concerns about potential conflicts between state and federal overtime laws, Parker said.
Federal laws say overtime is due when employees work beyond a 40-hour week. But some states have rules based on an eight-hour day, saying overtime must kick in regardless of whether the worker exceeded a 40-hour week. That means overtime pay might be taxed differently at the state and federal level, which will be difficult for workers (and employers) to navigate.
“They may not be catching the nuances there between a state overtime hour that wouldn’t count as a federal overtime hour,” he said.
Depending on the final guidance, Parker said No Tax on Tips and Overtime have the potential to be a huge benefit to restaurant workers.
And though the direct benefit to employers is not there, it does offer the prospect of an indirect benefit, he said.
“The question is: does it draw more people to the industry that want to work, want to work hard, want to deliver amazing service to generate tips?” Parker said. “We might have a real solution to constricted labor issues that come and go within the industry.”
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