Included in President Donald Trump's “One Big Beautiful Bill Act” is a provision allowing some categories of workers to deduct up to $25,000 in "qualified tips" per year.
Trump touted his plan for “no tax on tips” pretty hard during the 2024 presidential election. It, no doubt, won him a few votes because of it. Former Vice President Kamala Harris touted a similar plan during her campaign.
This provision kicks in for the 2025 tax season through 2028. But despite Trump’s catchy slogan, the “no tax on tips” provision isn’t as black and white as folks would hope. There still are some tax on tips that restaurant owners, operators, and their staff should be aware about. It’ll affect how staff file taxes and/or how operations run their business.
Tax on Mandatory Gratuities
All voluntarily paid tips with cash, credit, or check count as qualified tips. However, mandatory gratuities -- such as service charges on bills -- don’t fall under Trump’s qualified tips provision. This means that taxes must be paid on any tips earned through mandatory or auto-gratuity.
In the eyes of the IRS, services charges and auto-gratuity have never been considered tips even if operators passed that cash along straight to staff. With the new qualified tip rule, restaurants may be more scrutinized and will have to pass service charges through payroll – even if they weren’t doing that before.
Nothing really changes for diners beyond needing to calculate tips for large groups where auto-gratuity isn’t automatically added in.
How Should Restaurants Respond?
This is a less-than-ideal situation for both restaurant operators and their staff.
On one hand, if operators use mandatory gratuity and don’t drop that from checks, their staff will have to pay taxes on those earnings. On the other hand, if they do drop those service charges, they’re gambling that larger groups will still tip and tip well.
How well do you and your team trust your guests to do the right thing?
National Restaurant Association (NRA) research shows that more than half of full-service operators (54%) — including 67% of fine-dining operators — sometimes add a service charge or automatic gratuity to guest bills. Of this group, 12% add a service charge or auto-gratuity to all bills, while 88% only add it to parties that exceed a specific number of people (typically six or more).
In September, 27% of California’s bartenders’ income came from tips, according to Square, which analyzed payroll data from more than 100,000 employees. Full-service restaurant workers’ tips made up about 17% of their income in September. For quick-service restaurant employees where there is no table service, tips were about 11% of their total income.
If you decide to drop auto-gratuity, we highly recommend putting the suggested tip amounts (18%, 20%, and 25%) at the bottom of checks. You can have staff circle that section to draw attention to guests’ eyes.
If you’re running payment via tablets and the like, you’ll need to add an option that lets guests customize the tip amount. You can still list pre-set tip percentages but allowing folks to edit the tip amount to add more or less is required to be considered a qualified tip.
Several members of Congress from Nevada tried getting auto-gratuities to be counted as qualified tips but Trump’s Treasury Secretary Scott Bessent didn’t move quite that far. With that said, the current rule as stands allows restaurants to, for example, have a 20% auto-gratuity on parties of six or more but requires the waitstaff to let guests know that gratuity is completely optional.
Get Staff Involved in the Decision
How operators handle this murky tip situation may also affect their ability to retain current staff and hire new ones.
Does your current staff prefer knowing they’re getting a set tip amount for larger groups but will have to pay taxes on it or are they willing to risk lower tip amounts from large tables but not have to pay taxes on it?
Since it’s their bank accounts that’ll be directly affected, we suggest operators and managers talk to their teams to see what they prefer. That way you know what your team wants and can do right by them.
Operators should talk to their accounts for advice and pass that information along to staff, so the team can make an educated decision.
At the end of the day, all business decisions fall to the owner/operator, but some decisions like this should include stakeholders – in this situation, your staff.
Summary
Let’s just quickly rundown what restaurant operators and their staff need to know:
Voluntary tips from cash, checks, and cards fall under the qualified tips.
Auto-gratuity and mandatory gratuity/services charges do not fall under qualified tips.
Venues can list suggested tip amounts on digital payment platforms and for large parties, but it must be clear that the guest can edit that amount to whatever they want.
In short – if it’s voluntary, it’s qualified; if it’s mandatory, it’s not qualified.
Again, chat with your accountant and your team to figure out the best path forward. Do right by your staff – and that may change from business to business. Also, it’s possible the IRS will change their stance, so keep an eye out.