No Tax on Tips Act — An Employer’s Guide
What This Means
Congress has passed the No Tax on Tips Act, giving eligible tipped employees a major new tax break.
Reported cash tips (including credit card tips and tips shared under valid tip pools) will now be tax-deductible for employees.
Employees won’t see bigger paychecks during the year (normal payroll withholding still applies). Instead, they’ll see the benefit when they file their federal tax return — either a lower tax bill or a larger refund.
For most employees in a ~22% tax bracket, this could mean thousands of dollars back that used to go straight to the IRS.
This applies even to positions not typically regulated under tip wage rules- including many outside of service and hospitality, so even if you are an employer not in these industries, this could apply to your employees if they accept tips.
Employer Considerations
Even though the tax break is for employees, it has important implications for employers:
Tip Reporting Accuracy is Critical
Only reported tips count. If employees don’t report tips, or if payroll/W-2 reporting isn’t accurate, employees can’t claim the deduction.
Work with your payroll provider now to ensure tip reporting and W-2 generation are accurate.
Service and Gratuity Charges Don’t Qualify- only “voluntary” tips.
Automatically added charges (like banquet or service fees) are not deductible for employees. These remain taxed as wages.
Employers relying on auto-gratuities may want to revisit policies if they want staff to benefit.
Cap and Income Limits Apply
Deduction capped at $25,000 per year.
Phases out gradually above $150,000 AGI (or $300,000 for joint returns).
Employer Tax Rules Don’t Change
Employers must still withhold and pay all applicable payroll taxes (FICA, FUTA, etc.) on reported tips.
This is an employee benefit, not an employer tax break.
Strategic Questions for Employers
Wage Increases: With tipped employees effectively receiving a raise from the federal government, do you want to adjust (or delay) planned increases?
Tip Credit Strategy:
In NYS, minimum wage is scheduled to rise again in 2026 (+$0.50/hour = $1,040 annually for full-time).
If your tipped staff are now pocketing more in refunds, would taking the tip credit (where eligible) offset increased labor costs without reducing employee take-home pay?
Communications: Do you want to share this news with employees? For example:
An employee earning $200/week in tips = $10,400/year.
At a 22% bracket, that’s ~$2,288 they could get back at tax time.
Positioning this as “hidden raise from the government” could help with retention and morale.
Overtime Incentives: Overtime earnings are also receiving a similar tax break this year — another potential motivator to communicate and consider similiarly.
Employer Action Items
✔️ Confirm accurate tip reporting with payroll.
✔️ Review policies on automatic gratuity or service charges.
✔️ Revisit compensation and tip credit strategy for 2025–26 planning.
✔️ Decide how and when to communicate this benefit to staff.
✔️ Consult with legal/payroll advisors before making structural pay changes.
Eligible Occupations
Employees in a wide range of industries qualify:
Food & Beverage: servers, bartenders, cooks, dishwashers, hosts, bakers.
Entertainment & Events: dealers, performers, DJs, ushers, photographers.
Hospitality: bellhops, concierges, desk clerks, housekeeping.
Personal Services: hairdressers, massage therapists, trainers, tattoo artists.
Transportation & Delivery: taxi/rideshare drivers, valets, shuttle and delivery drivers.
(Full federal list available online here.
Bottom Line
This law is a big win for employees, and a planning opportunity for employers. While you still carry the same payroll tax obligations, you may have new flexibility in wage strategy, tip credit usage, and employee communications.
📌 We recommend consulting with your payroll provider and legal/HR advisor before making changes.
