As the proposed “No Tax on Tips” rule takes shape, restaurant industry groups are pushing for change, saying some workers will be shut out of the benefit.
The Trump Administration’s mega tax-and-spending bill adopted in July included a provision that will allow certain workers to deduct tipped income and overtime from their taxes.
The tip deduction applies up to $25,000 in tips per year, and it is phased out for those with a gross income of more than $150,000 (or $300,000 for joint filers). The Council on Economic Advisors earlier this year estimated the tip provision could increase average take-home pay for tipped workers by about $1,300 per year.
It’s a temporary measure. The tax benefits are scheduled to sunset at the end of 2028. But, in theory, the rule could help millions of restaurant workers save on federal taxes as soon as this year. The benefit applies to tipped income already earned, starting on Jan. 1, 2025.
Because of that looming deadline, however, the rules-making process has been a bit rushed. Typically proposed rules allow a 60-day comment period.
For this proposal, however, the public has had 30 days, and the deadline for written public comments ends on Wednesday. A public hearing is scheduled for Thursday, despite the federal government shutdown, and industry watchers expect a final rule could be published within weeks.
Restaurant industry groups, meanwhile, would like to see some changes, saying that, as currently drafted, conflicts with some state laws will likely result in some workers being shut out, further exacerbating inequities between front- and back-of-the-house workers.
Earlier this year, the Internal Revenue Service drew up a list of tipped workers who would be eligible to claim the deduction, and it was broader than expected.
The list includes the expected roles of servers, bartenders and counter-service workers—those typically in the line of service. But it also included back-of-the-house positions like chefs, cooks, hosts, food-prep workers, dishwashers and bakers.
Under the proposed rule, however, tips are only deductible if the customer has given the gratuity voluntarily.
That means automatic service charges, for example, would not likely be deductible—unless the restaurant makes it clear the service charge is optional and can be modified.
Using an example given in the proposed rule: A customer at Restaurant Y is presented with the bill, and the total gives options for a tip, say, 15%, 18% or 20%, as well as “other” and “no tip.” If that guest selects 18%, then that 18% tip would qualify as deductible. In that case, the guest controlled whether and how much to tip.
But if the bill at Restaurant Y includes a line for a 15%, 18% or 20% tip—with no opt-out or custom option—then that tip would not qualify for the deduction.
The rule also might allow some back-of-house workers to deduct their share of a tip-pool arrangement, but not in a number of states that have specific rules about tip pooling.
In New York, for example, tip pooling is not allowed, so back-of-house workers would not be allowed to deduct tips, leaving a huge swath of workers out of the tax benefit.
“Treasury’s proposal draws a line between who deserves a tax break and who doesn’t—based not on their work, but on whether they’re allowed to receive tips,” said Erika Polmar, executive director of the Independent Restaurant Coalition (IRC), in a statement. “Cooks, dishwashers, and other essential staff are excluded under federal and state laws that limit tip pooling.”
In the letter, the IRC argues that service charges should be considered as “pre-determined tips,” that are negotiable and agreed to in advance of a reservation, or when a diner sits down, as opposed to when the bill comes.
Excluding those service charges from the deduction would essentially compel restaurants to shift to a tipping-only model, which the IRC contends would lower income for restaurant workers.
“Recognizing service charges and auto gratuities are the only way to ensure every restaurant worker benefits as Congress intended,” said Polmar. “This policy was designed to put more money in workers’ pockets. Without these changes, it will do the opposite—cutting wages, widening inequities, and undermining the progress small restaurants have made to professionalize the industry.”
The IRC urged the Treasury to establish federal preemption, so the tax deduction would apply uniformly nationwide, and not vary by state.
The coalition also called for a one-year transition period, to allow restaurants that use service charges more time to adapt and avoid penalizing workers in 2025.
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