Restaurants may need to rethink their mandatory gratuity policies if they want this income to count as qualified tips for their workers under the new tax laws.
The “no tax on tips” provision was part of President Donald Trump’s One Big Beautiful Bill act. It allows certain workers to deduct up to $25,000 in “qualified tips” per year from 2025 through 2028. However, mandatory gratuities, the 15% to 20% that restaurants often impose on parties of six people or more, aren’t eligible for the deduction. This has been disappointing for restaurants and the food service industry, which had hoped for a different outcome.
Some advocates for the restaurant industries have been lobbying for a change. They believe automatic gratuities should be treated as tips. The Culinary Union in Nevada submitted formal recommendations to the U.S. Department of the Treasury and the IRS that automatic gratuities and suggested tips both be treated as eligible tip income. Separately, several members of Congress from Nevada had asked Treasury Secretary Scott Bessent to ensure that automatic gratuities are deemed eligible for deduction of tips.
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“Functionally, for employees, there is no distinction between auto-gratuity and a tip, and inclusion of this income as eligible will prevent arbitrary distinctions between tip practices that would disadvantage workers based solely on the business model of their employer,” lawmakers wrote in a letter dated Aug. 12.
However, it doesn’t seem likely that the distinction between service fees and tips will be upended. The IRS in September issued proposed rules on the new “no tax on tips” deduction. The rules aren’t final yet, however, the language seems to be unambiguous about the tip having to be voluntary.
“Congressional intent is pretty clear,” said Andrew Lautz, director of tax policy for the Bipartisan Policy Center. “What’s unclear is how restaurants respond to that,” he added.
Some restaurants are planning to wait and see. “Restaurant operators are watching closely for the final ‘No Tax on Tips’ rules from the IRS and will evaluate any shift in their restaurant’s current policies on tipping so that it best suits their tipped employees’ desires,” Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, wrote in an email.
“These employees have chosen a restaurant job because of the income potential they get from tipping, so operators want to make sure that they can take full advantage of the tax credit while it is available to them,” Kennedy added.
A spokesperson for the Texas Restaurant Association mentioned that some restaurants are “consulting with their accountants, point-of-sale providers, and teams to determine what approach works best for their business and employees.
Some business owners may also decide to make changes for competitive reasons. “For restaurants who use the commission-based model or utilize service charges, those servers would likely consider it a disadvantage to forego $25,000 of tax-free income when they could potentially move to a restaurant that does not utilize service charges and are therefore eligible for tax-free tips up to $25,000,” said a spokesperson for The Florida Restaurant and Lodging Association.