No Tax on Tips: What Restaurant Employers Should Know in July 2025

Updated November 8, 2026. This article was first written on July 11, 2025, one week after the federal “no tax on tips” provision was signed into law. It describes the statute as enacted and what was still pending at the time. Later IRS guidance and reporting relief are described separately in the “Current context” section near the end. It is general information, not tax advice. It covers federal income tax only; state tax treatment is a separate question.

Servers are already asking

Within days of July 4, 2025, bartenders and servers across California were asking managers the same question: “So I don’t pay taxes on my tips anymore?” The short answer is more complicated than the slogan. On July 4, 2025, the President signed Public Law 119-21, the budget reconciliation act widely referred to as the One Big Beautiful Bill. Section 70201, titled “No Tax on Tips,” added a new section 224 to the Internal Revenue Code allowing a federal income tax deduction for qualified tips.

It is a deduction, not an exemption from all taxes. It has a dollar cap, an income phase-out, and conditions about which tips and which occupations qualify. For restaurant and bar operators, the bigger near-term issue is that the law also changed what employers must report. This guide explains what the statute says, what it leaves to the Treasury Department, and how managers can answer staff questions without giving tax advice.

What the deduction is

New section 224(a) allows a deduction equal to qualified tips received during the taxable year that are included on specified information statements furnished to the individual, such as a Form W-2, or reported by the taxpayer on Form 4137.

The statute sets limits:

• A $25,000 cap. The deduction for any taxable year shall not exceed $25,000.
• An income phase-out. The deduction is reduced by $100 for each $1,000 by which modified adjusted gross income exceeds $150,000, or $300,000 for a joint return.
• Available to non-itemizers. The act amended section 63(b) so the deduction is available to taxpayers who take the standard deduction.
• A Social Security number requirement. The taxpayer must include their Social Security number on the return.
• Joint filing for married taxpayers. Married individuals must file jointly to claim it.

Which years

Under section 70201(j), the amendments apply to taxable years beginning after December 31, 2024, so the deduction covers tips received in 2025. Section 224(h) provides that no deduction is allowed for any taxable year beginning after December 31, 2028. As written, it is a four-year provision covering 2025 through 2028.

What counts as a qualified tip

Section 224(d) defines qualified tips as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary of the Treasury. “Cash tips” include tips paid in cash or charged, and, for employees, tips received under a tip-sharing arrangement. That matters for bussers, barbacks, and food runners who receive tip-outs.

The statute excludes amounts unless they are paid voluntarily without consequence for nonpayment, are not the subject of negotiation, and are determined by the payor. It also excludes tips received in a “specified service trade or business” under section 199A and allows additional requirements by regulation.

The voluntariness requirement has a clear consequence for restaurants. A mandatory service charge, such as an automatic percentage for large parties, is not paid voluntarily and is not determined by the guest. The IRS has long treated distributed service charges as wages rather than tips, as explained on its tip recordkeeping and reporting page. Operators who rely on service charges should not tell staff those payments will qualify.

What is still pending

As of mid-July 2025, several key pieces depended on Treasury action:

• The occupation list. Section 70201(h) requires Treasury to publish, not later than 90 days after enactment, a list of occupations that customarily and regularly received tips on or before December 31, 2024. Until that list exists, no one can say definitively which jobs qualify, although servers and bartenders are the obvious candidates.
• Anti-abuse rules. Section 224(g) directs Treasury to prescribe regulations to prevent reclassification of income as qualified tips.
• Withholding. Section 70201(i) directs Treasury to modify withholding procedures for taxable years beginning after December 31, 2025. For 2025, paycheck withholding was not required to change under the statute.

Managers should resist the urge to predict how those questions will be answered.

How the math works, in simplified examples

These simplified illustrations apply only the statute’s cap and phase-out, ignore every other part of the tax code, and assume the occupation qualifies.

A full-time server reports $18,000 in credit card and cash tips for 2025 on her monthly tip reports, and her modified adjusted gross income is well under $150,000. Her W-2 shows the reported tips. The cap and phase-out do not limit her, so the deduction could be up to the $18,000 in qualified tips.

A bartender at a high-volume venue reports $31,000 in tips. The deduction is capped at $25,000, so the remaining $6,000 is taxed normally.

A single bar manager who also receives tips has modified adjusted gross income of $170,000. That is $20,000 over the threshold, so the $25,000 cap is reduced by $100 for each $1,000, or $2,000, leaving a maximum of $23,000.

In each case, Social Security and Medicare taxes still apply to the reported tips.

What does not change

The deduction is an income tax deduction. The statute does not exempt tips from Social Security and Medicare taxes. Employees still have to report tips, and employers still have to withhold and pay payroll taxes on reported tips. The IRS tip reporting page explains that employees must keep a daily tip record, report cash tips to the employer by the 10th day of the following month unless the total is under $20 for the month, and report all tips on their federal return.

The new law makes accurate reporting more valuable to employees, because only tips included on an information statement or reported on Form 4137 can be deducted. An employee who underreports tips is shrinking a deduction they could otherwise claim.

New reporting duties for employers

Section 70201(f) amended the information reporting rules. For wages, section 6051(a) now requires the W-2 to show the total amount of cash tips reported by the employee and the employee’s occupation, as described in section 224(d)(1). Similar changes apply to Forms 1099 for nonemployees and to third-party settlement organizations.

Under the transition rule in section 70201(k), for cash tips required to be reported for periods before January 1, 2026, filers may approximate a separate accounting of cash tips by any reasonable method specified by the Secretary. In July 2025, the details of that method had not yet been issued.

For payroll teams, the practical steps are to confirm that tip reports are captured cleanly in the payroll system, that tips and service charges are separated, and that job titles in payroll match the work employees actually do.

The employer tip credit

The act also amended the section 45B credit, the employer credit for Social Security and Medicare taxes paid on certain tips. Food and beverage establishments remain covered, and the act extended the credit to certain beauty services. For restaurant operators already claiming the credit, the change mainly confirms the credit continues.

How managers should talk to staff

Managers are not tax advisers, and they should not promise anyone a refund. A careful script works better:

• “A new federal law allows a deduction for qualified tips starting with 2025, up to $25,000, with income limits.”
• “It is an income tax deduction. Social Security and Medicare taxes still apply.”
• “The IRS still has to publish the list of qualifying occupations and other guidance.”
• “Keep reporting all your tips accurately. Reported tips are what can be deducted.”
• “For your own situation, talk to a tax professional or check IRS.gov.”

Posting that message in the break room, in the languages your staff use, can head off misinformation. Our guide to accessible, multilingual staff training explains how to share workplace information so everyone actually understands it. Payroll and tip records also contain sensitive personal data, so handle them with the care described in our guide to employee records and privacy.

Questions servers are asking

“Will my paycheck get bigger now?” Not because of the statute itself in 2025. The law directs Treasury to change withholding procedures for years beginning after December 31, 2025. Any benefit for 2025 would generally show up when the employee files a return.

“Do my tip-outs count?” The statute’s definition of cash tips includes, for employees, tips received under a tip-sharing arrangement. Whether a particular job qualifies depends on the occupation list Treasury has not yet published.

“What about the 20 percent large-party charge?” If the guest cannot decline it or choose the amount, it fails the statute’s voluntariness test.

“I’m paid in cash. Does it matter if I report it?” Yes. Only tips on an information statement or reported on Form 4137 can be deducted, and unreported tips remain a tax problem.

Watch for tipping pressure

Some operators may be tempted to restructure pay so that more of it looks like tips. The statute anticipates that, directing Treasury to write rules against reclassification. Tips must be voluntary and determined by the guest. Converting service charges into “suggested” amounts that guests cannot decline does not make them tips.

Current context as of November 8, 2026

After this article was written, Treasury and the IRS issued guidance. An IRS news release dated November 5, 2025 announced Notice 2025-62, which provides penalty relief for tax year 2025 for employers that do not separately report cash tips or the recipient’s occupation, as long as returns are otherwise complete and correct. The release said Forms W-2 and 1099 for 2025 would not be updated for the new law. An IRS tax tip dated January 26, 2026 lists wait staff and bartenders among occupations that might qualify. The IRS tip reporting page now refers to a published occupation list and describes W-2 reporting with code TP and Treasury Tipped Occupation Codes. Employers should rely on the current IRS instructions.

The bottom line

The federal tips deduction is real, temporary, capped, and still being defined. Keep tip reporting accurate, separate service charges from tips, prepare payroll for new reporting fields, and point staff to official guidance rather than promises.

Sources

1. Public Law 119-21, Section 70201 (No Tax on Tips)
2. IRS: Tip Recordkeeping and Reporting (current page)
3. IRS: Penalty relief for tax year 2025 tip and overtime reporting (Nov. 5, 2025, current note)
4. IRS Tax Tip 2026-06: No tax on tips and overtime (Jan. 26, 2026, current note)

This article is general information, not legal advice.