Top 5 Things Restaurant Owners Should Know About the “No Taxes on Tips”

What it means for your staff, systems, and bottom line—and how to get ready.

Amidst another noisy election season, “no tax on tips” was one phrase that likely reached the ears of service workers and restaurant operators alike. 

But it’s real—the House and Senate have passed their own versions of the No Tax on Tips Act, fulfilling a campaign promise made both by President Donald Trump and former Vice President Kamala Harris to give tipped workers a break on their federal income tax. 

While it’s unclear which version of the bill will pass (and how the bills may change before it reaches the President’s desk), it’s safe to say that changes are coming as early as 2026. As an operator, these are the five things you should know—and do—to prepare.

1. What this policy is, and what it will do

This Senate’s bill (officially the No Tax on Tips Act) allows tipped workers in the USA to deduct up to $25,000 in cash tips from their taxable income, if:

• They work in an occupation that customarily receives tips (think: servers, baristas, delivery drivers).
• They report their tips to their employer for payroll tax purposes.
• Their annual income is under $160,000 (indexed to rise over time).

The IRS requires restaurants to report tipped income over $20 per month per employee and withhold income and FICA taxes accordingly. If passed at the federal level, this law would override that system.

Remember that this is not a payroll exemption—restaurants will still report tips, and employers must still pay their share of FICA. However, the benefit to employees is real: less tax withheld from paychecks and potentially larger refunds come tax season.

What to do now:

• Double-check that your current payroll provider handles tip reporting accurately.
• Prepare to adapt quickly if the law changes. Once passed, implementation could be fast-tracked. Being proactive in your adaptation will ensure a smooth transition for your staff and business.

 

 

2. Take-home pay may go up, and morale with it

This policy boosts take-home pay for front-of-house employees. Servers and bartenders who rely on tips will see more of that money in their pockets week to week since less will be withheld from their paychecks throughout the year.

The Urban-Brookings Tax Policy Center estimates that about 60% of households with tipped workers will benefit from the policy, with the average tax cut around $1,800.

That income bump can help you improve morale, increase retention, and attract talent in a tough labor market. But it will also come with questions. Team members will want to know how it affects them, and they’ll look to you for answers.

While an income bump for service workers is on the table, it may not be enough. The concept has its detractors:

Michael Lynn, a professor at Cornell whose research focuses on tipping, told the Associated Press: “If your goal is to help the poorest service workers, this is probably not the way to do it.”

He argues that a third of tipped workers don’t make enough to owe income tax and that the tax will only benefit tipped workers with higher incomes. 

“It’s overlooking non-tipped workers who need the help just as badly, and it’s giving the benefit predominantly to the least needy of the tipped workers,” Lynn said.

On the other hand, high-profile groups like the National Restaurant Association endorse the bill, and the highly influential Culinary Workers Union Local 226, representing the food service workers on the Las Vegas strip, supports the provision (with exceptions to the larger spending bill).

The bottom line is that some hospitality workers will pay less taxes and bring in more take-home pay. 

 

 

What to do now: Pull average tip data from your POS or 7shifts to prepare a simple FAQ. Even a high-level explanation will help you get ahead of the rumor mill and show your team you’re paying attention.

3. Automated, audit-ready tip tracking is now non-negotiable

Underreporting tips will still be illegal, and audits could increase under new rules.

If tips become tax-free, the IRS may increase auditing to verify that tip income isn’t being underreported.

That means:

• You’ll need exact shift-level reporting from the employee.
• Cash tips will need to be logged consistently.
• POS-to-payroll systems must be in sync.

If you’re still using manual tip tracking, you could face IRS penalties of $1,000+ per employee for underreporting and payroll fixes that will require billed accounting hours. And to top it off, frustrated team members when tips get miscalculated or they owe.

What to do now:

• Audit your last month of tip data: Are there discrepancies between POS, payroll, and employee-reported totals?
• If you’re using spreadsheets or POS-only tracking, switch to integrated tip management.

 

 

4. You’ll need to restructure how you calculate and withhold taxes, and make sure your tools are ready

This is no slight shift, but a fundamental change in how taxes on tips are handled in payroll. While federal income-tax withholding on tips up to $25,000 is paused, FICA taxes are still owed. That means:

• Your payroll system must stop withholding income tax on qualified tips.
• You still need to track and report all tips on W-2s.
• You must continue employer-side FICA contributions.

Not all payroll providers are built to make that switch quickly. If your system can’t separate taxed and untaxed tip income or update tax logic dynamically, you risk errors, amendments, or compliance gaps.

What to do now:
Ensure your payroll provider understands the difference between income tax deductions and payroll tax obligations and monitors federal guidance closely.

 

 

5. Tip pools and service charges may face fresh scrutiny

If direct tipping becomes a better financial outcome for employees, growing policies like tip sharing and service charges may not be attractive for tipped workers. 

This could lead to tension between front-of-house and back-of-house teams. Front-of-house employees may want to return to traditional tipping, while back-of-house workers—often supported via revenue shares or pooled systems—could feel left behind. It’s important to consider the potential impact on all staff members and communicate any changes transparently.

What to do now:

Start the conversation. Ask your team—privately or through a survey—how they feel about the current tip setup, and explore your options.

The bottom line: a change is coming

The No Tax on Tips Act is more than this week’s political theater—it’s a real policy that cannot be ignored. For restaurant teams, it could mean more money in every paycheck. For operators, updating how you track, report, and distribute tipped income. Whether or not this leads to a notable increase in staff pay, it has already impacted how tipped work is perceived and will continue to do so in the years ahead. 

Operators with manual or disconnected systems will be left to figure it out themselves. But you’ll be ready to adapt quickly if you have the right systems, from tip management to payroll. 

7shifts helps restaurant operators stay compliant, reduce errors, and build stronger teams—no matter what’s coming next.

If you’re not ready for tax-free tips, now’s the time to get your systems in order.