Articles
October 30, 2025
Breaking down ‘No Tax On…’ regulations
Policy team explains the new rules and how they affect restaurant employees.
President Trump proposed no taxes on tips during the presidential campaign in 2024, and it quickly gained bipartisan support.
No Tax on Tips and Overtime Premium Pay proposals have become a reality over the last 18 months. However, while most employees know the plans will reduce their federal income taxes, the government has issued certain rules they should be aware of.
During a recent presentation, Sean Kennedy and Aaron Frazier, National Restaurant Association executive vice president and vice president of Public Policy, respectively, shared key points on the regulations, which are part of the tax reconciliation bill:
These policies, Kennedy said, are intended to help restaurant and hospitality employers attract and retain workers by providing a significant tax benefit on a portion of their compensation.
“When we ask restaurant owners what their biggest challenge is, the answer is pretty much the same—recruiting and retaining the best workers,” he said. “One of the biggest advantages the industry has is the tip credit and tipped wages. People can do incredibly well and create fantastic livelihoods for themselves. President Trump proposed no taxes on tips during the presidential campaign in 2024, and it quickly gained bipartisan support. We engaged early on to make sure things like 45B would not be affected by it, and that it would be manageable and workable for employers.”
Now that it’s become law, Kennedy said his team has been getting questions about how it works and what it means, so the goal is to provide guidance on how best to explain it to employees at the shift level, and during recruitment.
“These new income tax deductions are temporary, and already in effect for tax year 2025,” Frazier added. “If you earned a tip working on Jan. 1, it qualifies for the no Tax on Tips, but it is set to sunset at the end of 2028, making it a rare 4-year tax deduction that will expire.”
“When we talk about the no tax on tips income deduction, that's something that will reduce up to $25K off of your total taxed income,” he said. “For example, a server who earns $20K in pay from their employer and $30K in tips will get to deduct $25K from their total income amount before their taxes are figured. So instead of paying taxes on $50K they are paying taxes on $25K. A tax deduction means subtracting a certain amount before you figure taxes on it. That’s very different from a tax credit. Make sure your team is clear on that when they're looking at their taxes.”
Kennedy and Frazier also emphasized that the IRS and U.S. Treasury Department last month issued a list of occupations qualifying for no tax on tips eligibility. Besides chefs, cooks, bartenders, servers and dishwashers, musicians playing at restaurants and valet drivers can also take advantage of the deduction. Other eligibility requirements include a valid social security number and that only tips reported to employers (and included on a W2) are eligible.
Frazier further stressed that managers and supervisors cannot participate in tip pools. In fact, the only time they can collect a tip is if they perform a direct service for a table and customer tips them directly for that service. “There are some exemptions, but be very careful about it,” he said.
He also addressed the no taxes on overtime pay regulation, which allows eligible workers to deduct the extra amount paid for hours worked beyond 40 in a week, from their federal income tax. Single filers can deduct up to $12.5K a year, while married couples filing their taxes jointly can deduct up to $25K. Like no taxes on tips, this deduction also ends in 2028.
Both No Tax on Overtime and No Tax on Tips phase out for high earners. For single filers earning $150K or more and joint filers earning $300K or more, the deduction is reduced by $100 for every $1K over $150K/$300K.
“No taxes on overtime is a pretty unique benefit, too,” he said. “It will help people keep more of their paychecks, more of their overtime premium pay. However, it’s also important to let employees know that they won’t get to go completely tax free. This is not a magic wand. We really hope we can help operators get a better understanding of how these rules work so they’ll be more comfortable when they talk about it.”
Watch the entire presentation On Demand and access additional resources on understanding the new regulations here
During a recent presentation, Sean Kennedy and Aaron Frazier, National Restaurant Association executive vice president and vice president of Public Policy, respectively, shared key points on the regulations, which are part of the tax reconciliation bill:
- "No Tax on Tips" provides a $25K income-tax deduction for certain tipped workers, reducing their taxable income on their federal taxes. This is a temporary 4-year policy.
- "No Tax on Overtime Premium Pay" provides a similar deduction for anyone who earns overtime pay over 40 hours per week, maxing out at $12.5K for single filers and $25K for joint filers. The deduction is only based on the half-time premium you earn when making time and a half over 40 hours.
- Eligible occupations for the tip deduction include several restaurant and hospitality roles beyond servers and bartenders.
- Employers will track and report tips and overtime pay on W-2 forms, and employees are responsible for claiming the deductions on their individual federal tax returns.
These policies, Kennedy said, are intended to help restaurant and hospitality employers attract and retain workers by providing a significant tax benefit on a portion of their compensation.
“When we ask restaurant owners what their biggest challenge is, the answer is pretty much the same—recruiting and retaining the best workers,” he said. “One of the biggest advantages the industry has is the tip credit and tipped wages. People can do incredibly well and create fantastic livelihoods for themselves. President Trump proposed no taxes on tips during the presidential campaign in 2024, and it quickly gained bipartisan support. We engaged early on to make sure things like 45B would not be affected by it, and that it would be manageable and workable for employers.”
Now that it’s become law, Kennedy said his team has been getting questions about how it works and what it means, so the goal is to provide guidance on how best to explain it to employees at the shift level, and during recruitment.
“These new income tax deductions are temporary, and already in effect for tax year 2025,” Frazier added. “If you earned a tip working on Jan. 1, it qualifies for the no Tax on Tips, but it is set to sunset at the end of 2028, making it a rare 4-year tax deduction that will expire.”
The nitty gritty
Frazier also said it’s important to make the distinction between tax deductions and tax credits. Noting that a lot of people use the terms tax deduction and tax credit almost interchangeably, he noted it’s important when talking to employees not to use the term tax credit. A tax credit, he said, is generally a size of money that's handed to you that you're eligible for, while a tax deduction simply reduces a portion of your annual income that's subject to be taxed.“When we talk about the no tax on tips income deduction, that's something that will reduce up to $25K off of your total taxed income,” he said. “For example, a server who earns $20K in pay from their employer and $30K in tips will get to deduct $25K from their total income amount before their taxes are figured. So instead of paying taxes on $50K they are paying taxes on $25K. A tax deduction means subtracting a certain amount before you figure taxes on it. That’s very different from a tax credit. Make sure your team is clear on that when they're looking at their taxes.”
Kennedy and Frazier also emphasized that the IRS and U.S. Treasury Department last month issued a list of occupations qualifying for no tax on tips eligibility. Besides chefs, cooks, bartenders, servers and dishwashers, musicians playing at restaurants and valet drivers can also take advantage of the deduction. Other eligibility requirements include a valid social security number and that only tips reported to employers (and included on a W2) are eligible.
Frazier further stressed that managers and supervisors cannot participate in tip pools. In fact, the only time they can collect a tip is if they perform a direct service for a table and customer tips them directly for that service. “There are some exemptions, but be very careful about it,” he said.
He also addressed the no taxes on overtime pay regulation, which allows eligible workers to deduct the extra amount paid for hours worked beyond 40 in a week, from their federal income tax. Single filers can deduct up to $12.5K a year, while married couples filing their taxes jointly can deduct up to $25K. Like no taxes on tips, this deduction also ends in 2028.
Both No Tax on Overtime and No Tax on Tips phase out for high earners. For single filers earning $150K or more and joint filers earning $300K or more, the deduction is reduced by $100 for every $1K over $150K/$300K.
“No taxes on overtime is a pretty unique benefit, too,” he said. “It will help people keep more of their paychecks, more of their overtime premium pay. However, it’s also important to let employees know that they won’t get to go completely tax free. This is not a magic wand. We really hope we can help operators get a better understanding of how these rules work so they’ll be more comfortable when they talk about it.”
Watch the entire presentation On Demand and access additional resources on understanding the new regulations here
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