No tax on tips: what it means for restaurant owners

“No tax on tips” is a federal income tax deduction that belongs to your tipped workers, not to you. The IRS says a worker can deduct up to $25,000 a year of qualified tips for tax years 2025 through 2028, and the final regulations say it does not change the wages that Social Security and Medicare tax is figured on. So what you pay as the employer on tips stays the same; what changes is paperwork, because the 2026 W-2 has new places for tips and each worker's tipped-occupation code.

The deduction in one paragraph

Tips have always been taxable income. The 2025 law, known as the One, Big, Beautiful Bill Act and called the Working Families Tax Cuts Act on newer IRS pages, added a deduction for qualified tips: voluntary cash or charged tips from customers, including tips a worker gets through sharing. A deduction lowers the income that federal income tax is figured on. It does not make the tips tax-free in every way, and it does not touch the Social Security and Medicare tax taken from the same tips.

These are the limits the IRS lists on that page, and the IRS tip reporting page gives the same years and cap:

• Up to $25,000 a year per return, for tax years 2025 through 2028.
• It shrinks at higher incomes: the deduction phases out when modified adjusted gross income is above $150,000, or $300,000 on a joint return.
• Itemizing is not required. A worker can take it with the standard deduction.
• A valid Social Security number is needed, and married workers must file jointly.
• Self-employed people can't deduct more than the net income from the business where they earned the tips.

Workers claim it on their own tax return, on a new form called Schedule 1-A. A server who already filed a 2025 return can amend it, the IRS says, to claim or change the deduction.

Whose tips qualify, by the IRS's list

The deduction is tied to the job, not the person. Only tips received in an occupation that customarily and regularly received tips on or before December 31, 2024 count, and the IRS publishes the list of occupations that receive tips (last reviewed June 28, 2026). Each job has a three-digit Treasury Tipped Occupation Code. The final regulations, announced April 10, 2026, say the list has more than 70 occupations, in eight groups. The restaurant jobs are mostly in the first:

The food and drink group on the page has ten jobs in all (it also lists 103, servers outside a restaurant, such as room service), and the page lists no job called manager or owner. The final rule says the list of occupations is closed, while the examples under each code are only examples. Being on the list is only the first test: the worker still has to receive qualified tips.

What counts as a qualified tip

The IRS release on the final regulations says a qualified tip is paid in cash or something like it (check, card, gift card, or a cash-denominated electronic or mobile payment), and comes from a customer or, for an employee, from a tip-sharing arrangement such as a tip pool. It is paid voluntarily and is not subject to negotiation. That is why a card tip on a tip screen counts.

Service charges are the part owners should look at. The release says they are generally not qualified tips unless the customer can disregard or modify them, and its own example is an automatic 18% charge for large parties. The W-2 instructions put it plainly: “Mandatory service charges added to the bill are not qualified tips.” The final rule also says a tip screen is voluntary when the customer can bring the tip down to zero, with a slider that goes to zero or an “other” box where zero can be typed. The IRS tip reporting page lists a digital payment prompt that makes the customer pick a tip above zero as an example of a service charge. Ask your accountant how your own screen is set up.

One more exclusion: tips earned in a “specified service trade or business” don't qualify. The IRS has reserved that part of the regulations for later and gave transition relief in the meantime. Ask your accountant whether it could touch your business.

What changes for you as the employer, and what doesn't

The first footnote of the final regulations settles the money question. Tips are wages for Social Security and Medicare (FICA) tax, but the deduction is “not taken into account in determining wages subject to FICA tax.” So the deduction does not reduce your share of that tax, and it does not reduce your workers' share either. I did not find an IRS page that says it lowers an employer's payroll tax. The IRS tip topic page still says the employer pays its share of Social Security and Medicare tax on tips, with the worker's share collected from wages or from money the worker provides.

The 2026 W-2

For 2025 the IRS treated reporting as a transition year. Its release of November 5, 2025 says employers and other payors would not face penalties for not separately accounting for cash tips or the worker's occupation, if the return was otherwise complete and correct, and that the 2025 forms would not be updated. That relief was for 2025. I did not find a page giving the same relief for 2026, so ask your accountant whether any applies.

The 2026 W-2 instructions (last reviewed April 30, 2026) and the IRS tip reporting page show what the new form holds:

• Box 12, code TP: the total cash tips the worker reported to you.
• Box 14b (new): the worker's Treasury Tipped Occupation Code. The old Box 14 “Other” moves to Box 14a.
• Up to two codes go in Box 14b. A worker with tips from more than two jobs gets codes for any two of them.
• The code 000: if any of the tips came from a job that doesn't qualify, the instructions say 000 goes in as one of the codes.

Ask your payroll provider where it gets these codes, and check them before the year ends. A server who also tends bar can have tips from two jobs, and the form has room for two codes.

The employer share is the same 7.65% rate the IRS credit page uses. The employer share of tax on tips is part of what your team costs you, so it belongs in your labor cost. Our labor cost guide counts payroll taxes in the number and leaves the tips themselves out.

The FICA tip credit is a different thing

If tipping is customary at your business, the IRS FICA tip credit (last reviewed August 16, 2026) gives back some of the employer Social Security and Medicare tax you paid on tips. You figure the credit on Form 8846 and, in most cases, attach it to your tax return. It is a credit against income tax, not a lower payroll deposit.

• Amount: the 7.65% employer rate times the tips that count, per the IRS's own worked example.
• What doesn't count: distributed service charges and auto-gratuities, which the page treats as wages, and tips that only bring a worker's pay up to the wage basis the page names. Check that basis on the page or Form 8846's instructions.
• Limits: it's nonrefundable and counts as a general business credit. Unused credit can be carried back one year or forward up to 20 years.

The credit page doesn't mention the new deduction. As the page reads today, the two rules sit side by side: the worker's deduction on income tax, and your credit on the payroll tax you pay. If your accountant has never claimed the credit, ask whether it applies to you.

What your servers ask, and what to answer

Each answer below is what the IRS pages say, in plain words. For anything about one person's tax return, point them to a tax preparer or the IRS.

“Is my paycheck going up?”

Not on its own. The deduction is claimed on the worker's return. The IRS withholding page says a worker who wants the deduction reflected in paychecks gives the employer a new Form W-4, using the IRS worksheet and the deductions line. That page was written for 2025 paychecks, so ask your payroll provider how it handles a new W-4 now.

“Do I pay less Social Security and Medicare now?”

No. The final regulations say the deduction does not apply for that tax. It still comes out of tips as before.

“Is our auto-gratuity on big parties covered?”

The IRS example says an automatic 18% charge for a large party is not a tip, so it isn't a qualified tip. Whether and how to change how you charge it is a question for your accountant.

“The kitchen shares our tips. Do the cooks get it?”

Cooks, food prep and dishwashers are on the IRS list, and the release counts tips received through a tip pool or other sharing arrangement. So a cook's share of customer tips can be a qualified tip, if the other rules are met. Who may be in a pool is a wage-law question, so check it with your state labor agency or accountant.

“I already filed. Did I miss it?”

The IRS page on amended returns says a worker who already filed a 2025 return can file an amended one to claim or change the deduction. Tell them to ask a tax preparer.

This week

1. 01Match your jobs to the IRS list. Write the three-digit code next to each tipped job on your staff list, using the table above or the IRS page. Note anyone who works two jobs, and any job that isn't on the list.
2. 02Ask your payroll provider three questions. Will the 2026 W-2 show Box 12 code TP and a Box 14b code for each tipped worker? Where do the codes come from? What happens for a worker with two jobs, or one with a job that isn't on the list?
3. 03Look at your POS. Does the tip screen let a guest enter zero? Are auto-gratuities set up as service charges, kept apart from tips in your reports? The IRS treats the two differently.
4. 04Check your tip reporting routine. The IRS page says workers report cash tips in writing by the 10th of the next month. Make sure you can find those reports. If you run a large food or beverage establishment, ask your accountant about Form 8027 and allocated tips, which Topic 761 describes.
5. 05Ask your accountant two things. Are we claiming the FICA tip credit on Form 8846? And how does our state treat tips for state income tax?
6. 06Give your team one answer. It's a federal income tax deduction on the worker's own return, up to the limits, for listed jobs and qualified tips. It does not change Social Security and Medicare tax. Send questions about their own return to a tax preparer.