Unpacking the implications of no service charge on restaurant bills
In this week's edition, we delve into the latest news and trends shaping the restaurant industry.
A New Policy for Tips in Restaurants
The Trump administration has introduced a new policy regarding tips in restaurants. The "One Big Beautiful Bill" (OBBB) signed on July 4, 2025, enacts a federal income tax deduction on qualified tip income for restaurant workers from 2025 through 2028. This means employees who regularly receive tips can deduct up to $25,000 per year from their taxable income on tips, significantly reducing their federal tax burden.
Impact on Restaurant Operators
For restaurant operators, this policy has several important impacts:
- Employee Take-Home Pay: Workers such as servers and bartenders potentially keep more of their tips after taxes, improving morale and potentially reducing high workforce turnover common in hospitality.
- Payroll and Reporting Complexity: Operators must adapt to new reporting and withholding rules. However, for the 2025 tax year, the IRS has not adjusted withholding tables yet, so taxes (including Social Security and Medicare) will still be withheld on tips during the year, with employees realizing the tax benefit when filing their 2025 return in 2026.
- Qualification and Compliance: Only tips reported on official tax forms (W-2, 1099) are eligible, and the IRS will issue further guidance defining qualifying occupations and detailed compliance rules.
- Income Phase-Outs: The deduction phases out for higher-earning employees (above $150,000 modified adjusted gross income for singles, $300,000 for joint filers).
While the policy primarily benefits tipped employees by lowering their tax burden on tips, restaurant operators should prepare for updated payroll processes and ensure compliance with evolving IRS guidelines. The tax advantage largely emerges at tax filing rather than immediate paycheck changes this year.
Other Highlights
- Senior Editor Joe Guszkowski discusses the impending sale of Olo in this edition. Joe, who focuses on technology and casual-dining chains, is the author of several articles in this edition.
- The article can be subscribed to on Apple Podcasts and Spotify. Readers can become members to support the journalism and unlock exclusive benefits, including unlimited access to all content.
Stay tuned for more insights from the world of restaurants. Follow us on Facebook, Twitter, and LinkedIn to stay updated.
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