No Tax on Tips: What Employers Should Know  | Evention LLC

Rolled out in 2025, the “No Tax on Tips” provision of the One Big Beautiful Bill Act (OBBBA) promises major tax relief for tipped workers but raises questions about compliance and long-term impacts. Employees who earn tips can now deduct their tip income from federal taxable wages– potentially saving them thousands of dollars in taxes. For operators, that means a new set of compliance and payroll challenges, areas where automation can play a critical role.

For hotel and restaurant owners and operators, the change brings both opportunities and obligations. Below, we break down the key points – from IRS requirements to industry reactions—and highlight how Evention’s automation platform ensures every dollar in tips is tracked, reconciled and returned to employees.

No Tax on Tips at a Glance

The No Tax on Tips rule is a cornerstone of the OBBBA, a sweeping tax package enacted in mid-2025. This new reality makes accurate tip tracking and reporting a business-critical function. In essence, employees in tipped jobs do not have to pay federal income tax on their tip earnings from 2025–2028 (the provision’s current sunset). Key facts include: 

Deduction Limit 

Up to $25,000 in tips per year can be deducted from an individual’s taxable income. In practice, a waiter, hotel housekeeper, bartender, or other eligible worker can earn tips and not pay a cent of federal income tax on that portion of their income. For operators, it also means that accurate tracking of tip earnings is essential to ensure employees receive the full benefit.

Eligibility 

To prevent abuse, high earners are phased out – only those with under $160,000 annual income (or $300k for joint filers) can claim the full deduction. The benefit is targeted to service industry workers whose jobs “customarily and regularly” involve tips, as defined by the official list of eligible occupations released in September 2025. Operators should be prepared to confirm eligibility across their workforce— a process that can be streamlined with automated payment and payroll integrations. Roughly 4 million tipped workers in the U.S. (about 2.5% of all workers) who could qualify according to the Yale Budget Lab. That scale underscores why compliance and automation will be mission-critical for the hospitality industry.

There are roughly 4 million tipped workers in the U.S. (about 2.5% of all workers) who could qualify according to the Yale Budget Lab. That scale underscores why compliance and automation will be mission-critical for the hospitality industry.

Timeline 

The tax break kicks in for tax year 2025 and currently expires after 2028. It was enacted as a temporary measure, though there are calls to make it permanent. Notably, a separate No Tax on Tips Act passed the Senate with unanimous support as a standalone bill, reflecting rare bipartisan agreement on the concept. 

IRS No Tax on Tips Requirements  

IRS No Tax on Tips Requirements  

Implementing “no tax on tips” isn’t as simple as workers just not paying tax. The IRS has set strict criteria to ensure only legitimate, reported tips get the break: 

• Tips must be voluntary: the IRS defines qualified tips as voluntary gratuities from customers (cash or card) that are either given directly or through tip-sharing pools. Mandatory service charges or auto-gratuities do not count as tips, they are treated as regular wages and remain taxable. 

• Tips must be reported and documented: Employees must report their tips to their employer (as has long been required for >$20 in monthly tips). Unreported (under-the-table) tips can’t be deducted, reinforcing the need for accurate documentation. 

• Operators must submit accurate reporting: Under the new law, employers with tipped staff must file information returns with the IRS/SSA and give each tipped employee an annual statement of their reported cash tips and occupation. Practically, this will be accomplished via enhancements to existing forms: 
  • The IRS has unveiled a new draft Form W-2 for 2026 that includes a special Box 14b to report the employee’s “Treasury Tipped Occupation Code” (corresponding to the worker’s job type from the IRS-approved list). Find the hospitality and entertainment list with TTOC codes below. This helps identify who is in a tipped occupation. 
  • In Box 12 of the W-2, a new code “TP” will report the total amount of qualified tips earned by that employee in the year. This figure is what the employee can then deduct on their tax return (via a new Schedule 1-A attachment). 
    For 2025, the IRS is offering transition relief – employers will still use the old W-2 format, but must keep track internally of tips for the deduction. By 2026, the W-2 forms will fully reflect the new reporting structure.

• Employee must be eligible: The Treasury preliminary list released on September 2025 names 68 occupations (across 8 categories like Food Service, Hospitality, Personal Services, etc.) that are considered traditionally tipped roles. This list ranges from the obvious – waitstaff, bartenders, bellhops – to some surprising jobs like Tailors, plumbers, and digital content creators. Only tips earned in these listed occupations qualify for the tax break. Employers should cross-reference which of their job positions fall under these categories to know which employees are eligible. Here is the list for the Hospitality and Entertainment industry with the new Treasury Tipped Occupation Code (TTOC). Find the full occupation list here. 

No Tax on Tips Eligible Occupation List

The IRS will only allow the deduction for amounts that show up on tax forms. This elevates the importance of robust tip reporting systems inside hospitality businesses. Failure to document tips not only deprives employees of the deduction but could put employers out of compliance with IRS filing rules. Tips+Gratuities is already helping with similar earning reporting to the IRS such as Form 8027.

Why It Matters for Hospitality Employees and Operators

The White House’s Council of Economic Advisers (CEA) projects that the average tipped worker will see their annual take-home pay increase by about $1,675 thanks to the income-tax exemption on tips. This is a meaningful bump for service workers – for context, tips comprise about 23% of total income for restaurant workers on average according to Square’s 2024 fall quarterly restaurant report, so not taxing that portion yields a sizable gain in net earnings. 

Rosanna Maietta, AHLA’s (The American Hotel & Lodging Association) president and CEO noted that “hundreds of thousands” of hotel employees from housekeepers and, bellhops, to servers and valets – will get to keep more income. In restaurants alone, more than 2 million tipped servers and bartenders stand to benefit directly said Michelle Korsmo, president and CEO of the National Restaurant Association, in a statement.

Exact savings depend on tip earnings and tax bracket. Below is an illustration of potential annual federal income tax savings for different occupations, based on Evention’s Tips+Gratuities data. Operators can also use our calculator to model the impact across their workforce.

Tip Documentation and Automation Solutions 

With the No Tax on Tips law, accurate and efficient tip tracking isn’t optional— it’s the only way operators can stay compliant and protect their employees take home pay. Here is how solutions like Evention’s automated payment and payroll platform make this possible:

• Integrated Point-of-Sale Systems: Modern POS systems record gratuities on credit card transactions in detail, tied to each employee. By using these systems properly, an operator ensures there’s a digital record of every tip received.  
  This data can directly feed into payroll – eliminating the old method of paper tip sheets. For example, Evention can generate a report of total tips by employee for any period, simplifying monthly reporting to IRS forms. 
• Automated Tip Distribution Software: In hotels and large restaurants, tips are frequently pooled and shared (for instance, among a banquet team or a group of bellmen). Evention’s Tips+Gratuities platform automates the complex calculations of tip pooling, tip-outs, and distribution across different departments. This kind of system pulls sales data (who earned what tip) and applies business rules to allocate tips, then exports the results to payroll.  
  Employees get their tip allocations faster and with transparency, and the total tips each employee receives are accurately logged. Additionally, these systems maintain an audit trail – crucial for showing the IRS that all tips paid out were reported. 
• Payroll and HR Systems Updates: Payroll providers are updating their software to handle the new tip deduction reporting. If you’re using a cloud payroll system, expect new fields for “qualified tips” amounts. By keeping your software up-to-date, you can automatically populate employees’ W-2s with the required info. From an employer perspective, it’s mostly about inputting the correct data – which, with Evention, can be done seamlessly.  

• Digital Tipping Platforms: The rise of cashless tipping apps and QR-code tip payments also feed into better tracking. When a guest tips a hotel housekeeper by scanning a QR code in the room, that tip is recorded in a database and routed to the employee’s paycheck, rather than being left as untraceable cash on a nightstand. With all tips flowing through electronic channels, employees don’t have to worry about remembering to report that $5 bill – the system has it logged. 

Key documentation requirements and how Evention can address them: 

Tip data for payroll reporting (monthly/annual) 

Manual Challenge: Managers had to collect tip reports or spreadsheets from multiple outlets or departments. Missing data could go unnoticed. 

Evention Solution: Seamlessly integrate tip data from POS and time clocks into one platform. This ensures every reported tip flows into payroll records and subsequently onto W-2 forms. 

Assign tips to correct occupation codes 

Manual Challenge: Larger hotels/ restaurants employ many roles; manually categorizing employees (e.g. server vs. bartender) for IRS might be confusing. 

Evention Solution: Configure employee profiles with occupation-specific mappings. These mappings can be used during tip distribution to ensure tips are assigned correctly based on roles and responsibilities. 

Provide each employee an annual tip statement 

Manual Challenge: Previously, tip info was just embedded in W-2 Box 1 wages; employees didn’t see a separate total of tips. 

Evention Solution: Generate detailed tip statements for individual employees, which can be used for annual summaries or tax documentation. 

Distinguish tips vs. service charges in records 

Manual Challenge: Without careful tracking, automatic gratuities could be mistakenly treated as tips in payroll. 

Evention Solution: Evention ensures IRS compliance by clearly differentiating between Charged Tips (voluntary) and Service Charges (mandatory) in its system. 

By using automation, hospitality businesses can streamline compliance – ensuring that every tip dollar is captured and substantiated. Not only reducing the administrative burden but protecting the business from mistakes – with automatic archiving of tip data, if the IRS ever audits the tip reporting, you have full records at your fingertips. 

For hospitality operators, this act marks a change in responsibilities while offering millions of workers an increase in take-home pay. With the law now in effect it’s important to act now and automate your processes to ensure a smooth transition.

Accurate tip tracking and compliance aren’t just best practices, they’re essential for ensuring employees receive every dollar they’re entitled to and protecting businesses from costly mistakes. By investing in Evention’s Tips+Gratuities solution and following the updated guidelines hospitality operators can turn this legislative change into a win-win: happier employees, streamlined operations, and full compliance.

Don’t wait until tax season to integrate your systems and adapt to the new reporting complexities. Start seeing the benefits today with Tips+Gratuities by Evention.

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