No Tax on Tips Is Here: A Reporting Checklist for Restaurant and Salon Owners

Bottom line: "No Tax on Tips" is in effect — starting with tax year 2025, your employees can deduct up to $25,000 of qualified tip income per year. But if you run a restaurant, boba shop, or nail salon, the real story is your reporting duties: the IRS granted penalty relief for 2025, and starting in 2026, W-2s must separately report qualified tips with an occupation code. Prepare now.

The employee side: what they save

Under the One Big Beautiful Bill Act, for tax years 2025–2028, workers in occupations that customarily receive tips can deduct qualified cash tips (including card tips and tip-pool shares), up to $25,000 per year. The deduction phases out above $150,000 MAGI ($300,000 joint). No itemizing required; a valid SSN is required, and married workers must file jointly.

Two catches:

• The occupation must appear on the Treasury's list of qualifying tipped occupations — food and beverage service dominates the list
• This is a federal income tax deduction only; Social Security and Medicare (FICA) taxes still apply to tips

The employer side: your obligations did not shrink

The common misunderstanding: the employee deduction does not lighten the employer's load.

• Tip reporting works exactly as before: employees still report tips to you; you still run them through payroll and withhold FICA
• Your employer FICA is unchanged — and restaurant owners can still claim the FICA Tip Credit (Form 8846). The new law also extends this credit to beauty service businesses, including nail salons
• W-2s still go out, but how tips are reported is changing — see below

Timeline: 2025 is a grace period, 2026 is for real

• Tax year 2025: the IRS issued transition penalty relief (Notice 2025-62) — separate reporting of qualified tips on the W-2 is not required this year. The IRS does recommend giving employees an occupation code and a separate accounting of tips so they can figure their deduction on the new Schedule 1-A
• Tax year 2026 onward: W-2s and applicable 1099s are being updated to require separate reporting of qualified tips plus a Treasury Tipped Occupation Code (TTOC) for each tipped worker. Make sure your payroll system can track tips per employee now

FAQ

Do employees still need to report tips to me?

Yes, nothing changed there. Employees must report tips of $20 or more per month to the employer; you run them through payroll and withhold. The deduction happens on the employee's own return.

Do cash tips and card tips both qualify?

Both count as qualified tips, including tip-pool distributions — as long as they are voluntary and the amount is set by the customer. Mandatory service charges are not tips.

My 2025 W-2s won't show tips separately. How do employees claim the deduction?

They use the IRS's Schedule 1-A, working from W-2 Box 7 and their own records. A separate tip statement from you makes their filing much easier.

Does this matter for nail salons?

Yes. Beauty services are on the qualifying occupation list, so employees get the deduction — and the new law extends the FICA Tip Credit (previously food-and-beverage only) to beauty businesses, a brand-new credit for salon owners worth running the numbers on.

This article is general tax information, not personalized advice. Please consult a professional for your situation.