As a slogan in last year’s presidential campaign, “no tax on tips” was short, memorable and effective.
As tax policy, it is more complex.
On Thursday, the House passed a domestic spending bill that includes a provision to to give tipped workers a tax break on gratuities. following through on a vow made by both President Trump and former Vice President Kamala Harris. The bill faces changes before it reaches Mr. Trump’s desk, but the Senate has already voted unanimously for a No Tax on Tips measure.
The new bill will make the change effective from 2026 to 2028. How will it affect food-industry workers and diners? Here’s what we’ve learned from interviews with tax lawyers, hospitality professors and industry groups:
How are restaurant employees currently taxed on tips?
The federal tax code requires that every tip be reported as income. Whether it’s a $20 bill handed to a host, a line filled in on a check or a button pressed on a keypad, employees and employers are required to track and report every cent. This applies whether each worker keeps the tips or the money is pooled and redistributed.
What counts as a tip?
In the tax code and in this legislation, the term “cash tip” applies to tips given in bills and coins, on a credit or debit card, or via the business’s electronic payment system. It has not yet been determined whether tips that go directly to a server via a service like Venmo or PayPal would qualify as cash. Service charges, which are legal in some places, are added by the business and do not count as tips.
What will the new bill do?
It will make tip income exempt from federal income taxes. That amount will be subtracted from reported income as an “above the line” deduction on a tax return. That will reduce how much income tax is owed. The tips will still have to be tracked and reported.
Who will get the deduction?
There is debate over who will benefit from the measure, which applies to all tipped workers in the restaurant business, including not only servers but also baristas, food delivery drivers and anyone holding out a payment screen after they have sold you food. According to government data, there are more than two million tipped restaurant workers in the United States.
How will this affect restaurant employees?
It will put more money in the pockets of tipped workers, like servers and bartenders, who interact directly with customers. Those employees will be able to deduct up to $25,000 in tips, unless they earn more than $160,000 in a year. (The amount will rise over time.)
Does this affect the tipped minimum wage?
No. The federal minimum wage is $7.25 per hour. (Many states and cities have higher ones.) Employers have been allowed to pay tipped workers just $2.13 of that sum since 1991. They can pay the lower wage only when the employee’s tips bring the total up to minimum wage. Those tips are also subject to income tax.
Will the change result in customers being asked to tip in more places?
Not necessarily. The measure applies only to employees who are “customarily” tipped, to be determined by the Treasury Department. Making tips tax-free might motivate businesses to encourage tipping, in order to retain employees who are chasing this deduction. It will be unlikely to reduce tipping prompts or the growing trend of tipping on more services.
How much of my tip goes directly to the server?
That depends on the workplace and local laws. Some restaurants allow servers to keep all their tips; others require tip pooling, which shares the money with bussers, bartenders and other staff members. This bill will not change who receives tips or how they are distributed.
Does tipping in cash make a difference?
Not for tax purposes. It does reduce a restaurant’s credit card processing fees, which are charged as a percentage of the total bill (about 2 percent to 3.5 percent of each transaction, and sometimes a 30-cent “swipe” fee). But it doesn’t leave a paper trail for the employee or employer to track, which can increase the risk of tax fraud. Some cash tips go unreported, which is considered tax evasion, but the scale of the problem has never been determined. As fewer customers pay with cash, it is probably diminishing.
Will this change federal rules that prevent kitchen workers from receiving tips?
No. So-called back-of-house employees, including chefs, cooks, dishwashers and porters, cannot receive any tips unless they participate in a legal tip pool. There are federal regulations that govern tip pools, and some provisions vary state by state.
Will tips continue to count as payroll, for federal tax purposes?
Yes. In addition to withholding employee contributions for Medicare, Social Security (FICA) and unemployment, employers must pay taxes for those programs based on the employees’ total wages, which include tips.
Will employers of tipped workers continue to get a tip credit?
The tip credit, officially called the 45B tax credit, helps employers of tipped employees by reducing their tax bill. They receive a credit for a portion of the Medicare and Social Security taxes they pay on tipped wages that exceed the $7.25-an-hour federal minimum wage. The new legislation will expand that credit to beauty businesses like salons and spas, but the restaurant portion will stay the same.
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Julia Moskin covers everything related to restaurants, chefs, food and cooking for The Times.
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