Yes, there is a new tax benefit for tipped workers. The law went into effect for tax years 2025 through 2028 and allows eligible employees who earn tips to deduct up to $25,000 of qualified tip income on their personal federal tax return.

The deduction phases out for higher earners. Single filers start losing the deduction once their income exceeds $150,000, and married couples filing jointly start losing it above $300,000. For most servers and bartenders, those thresholds won’t be an issue.

Here’s the important detail that often gets lost in the headlines: this is an income tax deduction, not an exemption from all taxes. Tips are still subject to Social Security and Medicare taxes. Your employees will still see FICA withholding on their tip income. The savings come on the federal income tax side of their return, not the payroll tax side.

The deduction also only applies to voluntary tips. Mandatory service charges that get added to a customer’s bill and then distributed to staff don’t qualify. The IRS treats those as regular wages, not tips. If your restaurant uses automatic gratuities for large parties, that income doesn’t count toward the $25,000 deduction for your employees.

For you as the employer, this law makes accurate tip tracking more important than it already was. Your employees need clean records of their tip income to claim this deduction, and those records tie directly to what gets reported through payroll. If tip reporting is messy or inconsistent, your staff may have trouble substantiating their deduction if the IRS asks questions.

This is one more reason to make sure your payroll system captures tip income correctly. When tips are tracked and reported accurately, employees have documentation that supports their personal tax returns and you stay compliant with your employer reporting obligations. Restaurants that rely on small business bookkeeping services with integrated payroll tend to have cleaner records when tax time comes around.

If you run a restaurant, bar, or other tipped-employee business and want help getting tip tracking and payroll set up correctly, reach out. Simona is a CPA and Enrolled Agent and can walk through how this works for your specific situation.