"No tax on tips" is law: what restaurants should do
A headline promise is now in the tax code. For restaurant owners, it means some admin changes — and a new message for recruiting front-of-house staff.
By the Xuru Technologies team · 8 July 2025
Key takeaways
- The One Big Beautiful Bill Act was signed into law on 4 July 2025.
- It creates a federal income tax deduction for qualified tips, up to US$25,000 a year, for tax years 2025 to 2028, with income limits.
- Tips remain subject to payroll taxes, and reporting rules are expected to be updated.
- Restaurants should check payroll and POS reporting, and can use the change in recruitment messaging.
Restaurant staffing remains tight. A clear explanation of what the new deduction means could help attract and keep servers and bartenders.
What happened
Nation's Restaurant News reported the bill's signing and the provisions affecting restaurants, including the tips deduction and the deduction for overtime pay. Guidance on implementation was expected from the IRS and Treasury.
What it means for restaurants
- Accurate tip reporting matters more. Employees will want correct records to claim the deduction.
- Payroll and POS settings may need updates as reporting guidance arrives.
- Recruitment message. Careers pages can explain the potential benefit — accurately and without promising tax outcomes.
- Not a payroll tax cut. Employer obligations on tips continue.
What to do now
| Area | Action |
|---|---|
| Payroll | Ask your provider how they'll support new reporting |
| POS | Make sure tips are recorded accurately per employee |
| Careers page | Add a short, accurate note and suggest staff check with a tax adviser |
| Advice | Speak to your accountant about the overtime deduction too |
Frequently asked questions
Do tips become completely tax-free?
No. Eligible workers can deduct qualified tips from federal income tax up to a limit, subject to income thresholds. Payroll taxes still apply. This is not tax advice.
Does this apply outside the US?
No, it's a US federal tax change. State rules may differ too.
Should restaurants mention it in job ads?
Yes, if accurate and general, while encouraging candidates to seek their own tax advice.
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