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.
And now, it’s real: As of July 4, 2025, President Trump signed the “Big Beautiful Bill” into law, including the No Tax on Tips Act.
That means changes are coming—and fast. Starting with the 2025 tax year, qualifying tipped workers can deduct up to $25,000 in cash tips from their federal income tax. Here’s what you need to 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 adjusted gross income (AGI) is under $150,000 (single) or $300,000 (joint)—phasing out beyond that.
- The IRS recognized their job as a tipped occupation as of December 31, 2024.
Remember that this is not a payroll exemption—restaurants will still report tips, and employers must still pay their share of FICA (Social Security and Medicare). However, the benefit to employees is real: less tax withheld from paychecks and potentially larger refunds come tax season.
Note: The IRS is required to issue formal guidance within 90 days of enactment—including a list of qualifying tipped occupations and definitions of “cash tips.” (Source: Ways and Means Committee)
What to do now:
- Double-check that your current payroll provider handles tip reporting accurately.
- Prepare to act fast—the policy is law and in effect for 2025–2028.
Recommended reading: Switching Restaurant Payroll: The Essential Guide + Checklist
2. Take-home pay may go up, and morale with it
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 White House Council of Economic Advisers estimates that eligible workers will take home $1,675 more per year.
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.
The provision has strong industry backing as well:
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).
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
IRS oversight is likely to increase, especially around tip underreporting and misclassification. 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.
How 7shifts helps:
- Automatically logs tips per employee when they clock out
- Connects tip tracking directly to payroll for error-free payouts
- Supports real-time tip adjustments in case of disputes, without spreadsheets or manager handoffs
4. You’ll need to restructure how you calculate and withhold taxes, and make sure your tools are ready
This is 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.
How 7shifts can help:
With 7shifts Payroll, everything just works—tips, time tracking, and pay are already connected. No more manual fixes or scrambling over tax changes. It’s payroll without the guesswork.
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 provision is law, effective starting in tax year 2025. 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 if you have the right systems, from tip management to payroll, you’ll be ready to adapt quickly.
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.
DJ Costantino, Content Writer
DJ Costantino
Content Writer
Hi! I'm D.J., 7shifts' resident Content Writer. I come from a family of chefs and have a background in food journalism. I'm always looking for ways to help make the restaurant industry better!
