Dissecting the implications of tip exemption for eateries in the restaurant industry
The Week in Restaurants: A New Policy on Tips and Its Implications
Welcome back to The Week in Restaurants, brought to you by Restaurant Business. This week, we delve into a significant change in the restaurant industry: the Trump administration's new policy on tips, enacted through the "One Big Beautiful Bill."
Starting in 2025 and lasting through 2028, eligible tipped workers can deduct up to $25,000 of their cash tips from federal taxable income. This means that tips, up to this cap, are not taxed as federal income. However, tips are still subject to Social Security, Medicare, and state/local taxes.
For restaurant operators, this policy brings about several key impacts. Firstly, reporting and compliance complexity increases as employers must continue withholding federal income tax on all tips and comply with normal payroll tax obligations. They also need to update payroll and tax reporting systems to itemize qualifying tips and overtime on employees' W-2 forms to facilitate employees claiming these deductions.
One potential labor market benefit is increased after-tax income for tipped workers, which could help restaurant operators recruit and retain staff in a challenging labor market. The National Restaurant Association supports the bill, highlighting that it could alleviate workforce shortages and stimulate investment in restaurants and employee benefits.
It's important to note that there is no direct reduction in employer payroll taxes owed on tips. However, the bill expands business tax credits for paying certain payroll taxes related to employee tips, which could provide some indirect financial relief to operators.
There is some expert concern that with tax relief on tips, restaurants might encourage or pressure customers to tip more, potentially affecting customer experience and workers’ pay structure. The policy's influence on tipping behavior and customer dynamics is uncertain but noteworthy for business planning.
The deductions apply only from 2025 through 2028, subject to Congressional extensions; afterward, tip income will again be fully taxed as before.
As we navigate this change, stay tuned for more insights from Restaurant Business. You can find us on Apple Podcasts, Spotify, and other platforms. For exclusive content and benefits, consider becoming a Restaurant Business member. Sign up here.
In other news, Wendy's CEO has some exciting updates, and Senior Editor Joe Guszkowski discusses the impending sale of Olo on Tech Check. Follow us on Facebook, Twitter, and LinkedIn to stay updated on the latest restaurant news.
This article is published by Restaurant Business and written by Senior Editor Joe Guszkowski. Stay tuned for more insights on The Week in Restaurants.
- The new policy on tips could potentially lead to increased use of technology in restaurants, as employers may invest in payroll and tax reporting systems to facilitate compliance with the changes.
- The impact of the new policy on tips extends beyond the restaurant industry, reaching industries that heavily rely on technology for financial management and processing, such as finance and business.
