NO TAX ON TIPS - Friend or Foe?

Unless you live in a cave, you’ve undoubtedly heard of the No Tax on Tips pledge that was smashed around like a volleyball during the last election cycle. Now that Trump’s “One Big, Beautiful Bill” is worming its way through Congress, this is looking more and more like tax law and less like blusterous campaign rhetoric. As the rubber meets the road nobody knows what the final version will look like but here are some key aspects that are currently in the House bill:

• Tipped employees in certain service industries will be eligible to claim a deduction on their individual income tax returns for tips reported to them on their W-2’s.
• The deduction applies only to income taxes – no deduction is allowed for social security taxes.
• Most front-of-the-house staff (servers, bartenders, etc.) would qualify, provided their total income is less than $160,000.
• The deduction is limited to $25,000
• You do not need to itemize in order to claim the deduction
• The deduction is available only for years 2025-2028.

As a restaurant or bar owner, the above would make some of your employees very happy, happy employees create a happy atmosphere and happy atmospheres drive sales. In addition, it should get a whole lot easier finding good servers/bar staff. But like momma always said – every silver lining has a cloud, so where’s the catch?

Well, firstly, the government just created a huge disincentive to go into management. To the extent that your shift managers or GM’s come from your staff, they just got cut out of $25k per year of tax-free income. If you just offered a management position to your bartender, expect him or her to demand more money for the switch.

Though on the surface, nothing will change for you, the employer, in terms of compliance, I expect that your tip credit may be looked at more closely. As the government looks for ways to reduce the cost of its promises, I can see a scenario where the tip credit ($5.50 per hour in NYC) would be ineligible for the deduction since it’s “really just salary disguised as a tip”. That would mean separating the tip credit from the rest of the tips in your payroll system – as if there’s not enough administrative headaches already.

Fast forward to 2029 when the Big Beautiful Bill sunsets. Your staff just got a huge reduction in salary now that they’re paying tax on tips again. They’re going to turn to you to make up the difference. That temporary gift to your staff is eventually going to fall on your shoulders – nobody likes a pay cut.

Have any other ideas about how this affects your bar/restaurant? Let us know!