No Tax on Tips Act Explained: What Restaurant Operators Need to Know (2025 Update)

What Is the No Tax on Tips Act?

This law allows employees in customarily tipped roles (like servers, bartenders, and delivery drivers) to exclude up to $25,000 in reported tip income from federal income tax each year.

It also exempts up to $12,500/year in overtime premium pay ($25K for married couples filing jointly).

Key points:

• Applies to income earned January 1, 2025 – December 31, 2028
• Only applies to reported tips (shown in Box 7 of the W-2)
• Does NOT remove FICA, Medicare, or likely state/local taxes—those still apply
• Employees will likely still have regular paycheck withholding; they’ll see the savings at tax filing time

Who Qualifies?

To benefit from the tip exemption, an employee must:

• Earn $150,000 or less annually ($300,000 for joint filers)
• Work in a customarily tipped role (servers, bartenders, etc.)
• Have their tips properly reported through payroll

Independent contractors (like gig delivery drivers) may also qualify—final guidance from the IRS is expected by October 2, 2025.

Important: Unreported cash tips, service charges, and automatic gratuities don’t qualify.

What It Means for Restaurant Owners & Operators

While the tax break goes to your staff, it affects your business in several ways:

• Recruiting & retention get easier
  • FOH jobs are now more attractive, helping you fill positions faster.
• More accurate tip reporting
  • Employees will be incentivized to report tips correctly.
• Payroll & compliance get more complex
  • You’ll need airtight payroll processes, updated W-2 reporting, and to stay alert for new IRS guidance.
• FOH vs. BOH wage gaps may widen
  • You may need to rethink BOH pay or retention strategies.

How It Impacts Employees

For tipped staff, this law means:

• Up to $25,000 in tips won’t be taxed federally
• They may get a larger refund at tax time
• It doesn’t mean more money in their paycheck right away (unless the IRS updates withholding rules)

For all employees (even BOH), the overtime exemption means up to $12,500 of overtime premium pay won’t be federally taxed each year.

How Fourth Helps You Stay Ahead

Navigating these changes manually can be overwhelming. Fourth makes it simple:

• Fully automate tip tracking and payouts with our Tip Payout solution
• Ensure accurate reporting for W-2s and overtime premium pay
• Stay audit-ready as IRS guidance evolves
• Eliminate manual admin work so you can focus on running a profitable restaurant

Want a Deeper Dive? Watch our Webinar

If you’d like to hear an in-depth discussion of the No Tax on Tips Act—including real-world implications for recruiting, retention, and payroll—watch our webinar.

This session features Patrick O’Reilly from CBIZ, a national leader in tax and advisory services, who shares expert insights on how this law impacts restaurant owners, operators, and employees.

Bottom Line

The No Tax on Tips Act is designed to make tipped jobs more attractive—and it will change how your FOH team thinks about reporting their income. For operators, it’s both a staffing advantage and a payroll compliance challenge.

Need help?

Talk to Fourth about how we can simplify tip reporting and payroll compliance—so you can focus on running your restaurant, not chasing IRS updates.

FAQs: No Tax on Tips Act

General Overview

Q: When does this start?
A: It’s retroactive to January 1, 2025 and runs through December 31, 2028.

Q: Who qualifies?
A: Employees earning ≤$150K annually ($300K joint) in customarily tipped roles with properly reported tips.

Q: Is this a tax break for employers?
A: Not directly. It benefits employees, but indirectly helps employers recruit and retain FOH staff and improve tip reporting accuracy.

Tips, Service Charges & Eligibility

Q: Do service charges or automatic gratuities qualify?
A: No—service charges are wages, even if distributed to staff. Only voluntary tips qualify.

Q: Does a tip pool count?
A: Yes, if it’s a qualified tip pool with tips voluntarily given by customers and reported in payroll.

Q: Are indirectly tipped staff (bussers, barbacks) eligible?
A: Yes—if they’re tipped out from a qualified pool and tips are reported.

Q: Do cash tips count?
A: Yes—but only if reported through payroll.

Payroll & Compliance

Q: Do tips still get taxed?
A: Yes—FICA, Medicare, and likely state/local taxes still apply. The exemption is only for federal income tax.

Q: Do employees stop paying upfront, or get it back later?
A: For now, they still have withholding. The savings show up at tax time.

Q: Does reporting more tips raise employer taxes?
A: Yes—employers still owe their FICA/Medicare match on all reported tips.

Q: Will payroll providers need to update W-2s?
A: Yes—IRS guidance (expected by Oct 2, 2025) will likely require new W-2 codes for overtime premium pay and updated instructions for tips.

Overtime Exemption

Q: Does the overtime exemption apply to all employees?
A: Yes—any employee can exempt up to $12.5K/year in OT premium pay ($25K joint filers).

Q: Does OT mean higher paychecks?
A: No—it’s still a tax credit at filing, not more per-paycheck income.

Q: Will OT need to be reported separately?
A: Yes—likely a new W-2 box for OT premium pay.

State & Local Considerations

Q: Are tips still subject to state income tax?
A: Usually yes—states may not conform to the federal exemption.