In light of the recent tax law changes initiated by President Trump’s One Big Beautiful Bill Act, many restaurants are reassessing their gratuity policies to ensure compliance and maximize benefits for their employees. The new legislation allows certain workers to deduct up to $25,000 in “qualified tips” annually between 2025 and 2028. However, the rules specify that mandatory gratuities—typically a 15% to 20% charge imposed on large parties—do not qualify for this deduction.
This clarification has left many in the restaurant and foodservice industry, which employs 15.7 million individuals and is the second-largest private-sector employer in the U.S., feeling disillusioned. Research indicates that over half of full-service operators, including a significant portion of fine-dining establishments, regularly add service charges or automatic gratuities to customer bills. Surprisingly, the Internal Revenue Service (IRS) has not recognized these service fees as tips.
Industry experts highlight that many restaurant owners are unaware that they shouldn’t view service fees as tips. According to Jean Hagan from the Eisner Advisory Group, there exists a disconnect between longstanding practices and current regulations. In order for employees to benefit from the new provisions, restaurant owners must adapt by processing all tips through payroll, which may require significant adjustments to their accounting systems.
Despite ongoing lobbying efforts aimed at redefining how service charges are treated—such as proposals from the Culinary Union in Nevada advocating for automatic gratuities to be classified as tips—changes to the law appear unlikely. The IRS has reiterated its stance that for a tip to qualify, it must be voluntary, leaving little room for reinterpretation.
As restaurant owners navigate these new guidelines, many are taking a cautious approach. Stakeholders are consulting with accountants and technological partners to determine the best course of action. Business leaders recognize the competitive implications; restaurants that maintain a commission-based model may lose valued staff to establishments offering clearer paths to tax-free earnings of $25,000.
Even without finalized regulations, preliminary guidance from the IRS has provided a framework for restaurants to help their employees maximize the deduction. For instance, if a restaurant presents an option for customers to adjust pre-adding gratuities, any amount voluntarily paid can qualify as a tip. Conversely, if the charge is mandatory, it does not qualify.
With deadlines approaching and uncertainty looming over the regulatory landscape, restaurant owners must act quickly. The IRS has introduced a temporary safe harbor for businesses for tax year 2025, which alleviates penalties for not accurately accounting for tips during the transitional period. However, this only applies to that specific tax year, necessitating ongoing vigilance for compliance in subsequent years.
As the situation develops, both restaurateurs and employees are poised to adapt, seeking clarity and ensuring that benefits under the new tax laws are fully realized.
