How "No Tax On Tips or Overtime" Impacts The Restaurant Industry

With the passage of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, restaurants across the country entered uncharted territory. Headlines promised “no tax on tips or overtime,” but beneath the surface, the policy is far more complex, and the implications for payroll, reporting, and employee expectations are enormous.

At Horizon Payroll, we work with restaurant owners and operators who are navigating this change. From managing payroll systems to educating staff, employers are asking the same questions:

• Will this increase my staff's take-home pay?

• What qualifies? What’s still taxed?

• How do we stay compliant without changing our POS or payroll workflows?

This guide answers those questions and walks you through what the law means, how it affects both employees and employers, and how to manage the transition with confidence.

What Does “No Tax on Tips or Overtime” Actually Mean?

First, let’s clear up a common misconception: despite the catchy name, OBBBA does not make tips and overtime completely untaxed. Instead, from 2025 to 2028, the law gives eligible employees federal income tax deductions:

• Up to $25,000 per year in qualified tips

• Up to $12,500 per year in qualified overtime (or $25,000 for joint filers)

These deductions lower taxable income, meaning workers keep more of their pay. But payroll taxes (Social Security, Medicare, and most state or local taxes) still apply. Your team will still see some tax withholding on their pay stubs. The main win is bigger take-home pay, especially for those who depend on tips and overtime.

Let’s break down some of the specifics of the no tax on tips or overtime regulations:

• Tips must be voluntary and properly reported (automatic gratuities and service charges don’t count)

• Overtime deductions apply only to the premium portion of time-and-a-half wages (that “extra half,” not the whole 1.5x)

• Payroll taxes like Social Security and Medicare still apply

• Employees must not exceed income thresholds ($150,000 for single filers, $300,000 for joint) to qualify for the full deduction

• Occupation eligibility is determined by the IRS and includes a wide range of restaurant roles

What Kinds of Food & Beverage Service Jobs Qualify for OBBBA Tip Deductions?

The good news for the restaurant industry is that the IRS already has clear guidance on who qualifies as a tipped employee. Jobs that have historically received tips as part of compensation are included, such as:

• Bartenders (mixologists, sommeliers) 

• Restaurant servers and wait staff (cocktail servers, dining car attendants) 

• Food servers, non-restaurant (room service staff, beer cart attendants) 

• Dining room and cafeteria attendants and bartender helpers (bussers, bar backs) 

• Chefs and cooks (executive chefs, sous chefs) 

• Food preparation workers (salad makers, sandwich makers) 

• Fast-food and counter workers (baristas, ice cream servers) 

• Dishwashers and kitchen helpers (dishwashers, stewards) 

• Hosts and hostesses (maître d's, lounge greeters) 

• Bakers (pastry chefs, cake decorators) 

• Food and goods delivery workers (pizza delivery drivers, grocery delivery workers) 

• Musicians and singers (lounge singers, instrumentalists) 

• Disc jockeys (wedding DJs, nightclub DJs) 

• Entertainers and performers (comedians, magicians)

Current vs. New Rules: Side-by-Side Comparison

IRS Transition Year: 2025 Penalty Relief

The IRS knows that these changes require serious updates to payroll, HR, and POS systems. To give businesses time to adapt, 2025 is considered a “transition year.” Under IRS Notice 2025-62, the IRS is offering penalty relief during 2025 for certain new reporting details.

In 2025, employers will not be penalized for failing to separately report:

• Qualified tips

• Qualified overtime

• Occupation codes on W-2s/1099s

…as long as:

• You file the required forms,

• The returns are otherwise complete and correct, and

• You meet existing reporting and withholding obligations.

Final regulations are still coming. Employers should stay alert for new IRS regulations regarding eligibility, recordkeeping, and reporting practices.

Why This Matters:

Failing to prepare now means scrambling later. Businesses that wait will face real penalties. Those who start tracking and reporting this information now will be ahead of the curve and will have smoother tax seasons moving forward.

What Restaurant Owners & Managers Need to Know

1) Payroll Systems Must Be Updated

Your payroll system needs to be ready to implement these changes to income and tip reporting. Manual work increases error risk, but automated, fully integrated payroll systems must be configured, tested, and kept up to date. It needs to:

• Track qualified tips and overtime pay separately

• Tag each employee with their correct occupation code

• Calculate and withhold the right amount for FICA and state/local taxes

• Keep crystal-clear records

At Horizon Payroll, we’re here to help you stay compliant, support your team, and simplify the complexity of payroll. We can help you handle the transition to no tax on tips and overtime with ease. 

2) POS and Tip Tracking Integration Is Critical

If your POS and payroll systems aren’t integrated, now’s the time to fix that gap. For accurate reporting, your point-of-sale (POS) system should:

• Distinguish voluntary tips from mandatory service charges

• Log which tips qualify for deductions

• Track cash and credit tips separately

• Sync cleanly with payroll

3) Employee Communication Is Essential

Proactive, clear communication helps prevent confusion and frustration. Employees might see the phrase “no tax on tips or overtime” and expect bigger checks immediately. But remember:

• These are deductions on their annual tax return, not outright exclusions from withholding in their paychecks

• Social Security and Medicare taxes still apply to all tips and overtime

• Staff should track and keep all reported tip info for tax season

4) Stay Alert for IRS Updates & Maintain Ongoing Compliance

OBBBA is here, but details are still evolving. New guidance will arrive, especially around occupation codes and what counts as “qualified” tips and overtime. Build in a process to stay updated, subscribe to IRS news, work with a payroll specialist, or partner with a provider like Horizon Payroll.

The rules around FICA and most state/local tax withholdings remain unchanged. Keep up with regular reporting, withholding, and remittance to avoid compliance issues.

How The "No Tax On Tips and Overtime" Affects Restaurant Employees

Your employees are the ones living this in real time. When you understand what they’ll experience, it’s easier to communicate clearly and avoid distrust.

Higher take-home pay for many workers

If the deduction lowers federal income tax burden, many tipped and overtime workers will feel it in improved paychecks. Workers who rely on tips and overtime are already seeing larger take-home pay. Full-time servers, bartenders, and kitchen staff may bring home hundreds more per month due to reduced federal withholding. That can offer immediate financial relief for those living paycheck to paycheck.

Pay stubs and W-2s may look different

Some employees may be surprised to see Social Security and Medicare taxes still being withheld. Others may not understand that these are deductions claimed during tax filing, not automatic tax-free wages and get blindsided at filing time. Clear communication helps both groups. Employees may notice:

• Lower federal withholding patterns

• New wage categories

• Added breakdowns or supplemental reporting

Longer-term considerations

Employees need to understand how short-term benefits fit into the bigger financial picture. Even with deductions, the way income is reported can affect:

• Income verification for loans (cars, mortgages, and other personal loans)

• Financial aid calculations

• Long-term planning based on taxable income

It is also worth reminding employees that this deduction only applies to the 2025–2028 tax years, and is not guaranteed to continue past 2028 without Congress extending the benefit. 

Why These Changes Hit The Restaurant Industry the Hardest

Tipped Wages Are the Backbone

In restaurants, tipped income is the majority of take-home pay for servers, bartenders, and delivery drivers. Any change to tip taxation impacts the entire compensation model, employee satisfaction, and your retention strategy.

Frequent Overtime Is the Norm

Restaurants face wild swings in demand: holidays, weekends, event catering, and staff turnover all lead to overtime. Changes to how overtime is taxed can change how employees want to be scheduled and how you budget labor.

Thin Margins Leave Little Room for Error

Labor is one of the biggest costs in food service. A small change in tax or compliance can ripple through your bottom line. Getting payroll wrong isn’t just a paperwork headache;  it can mean the difference between profit and loss.

How Horizon Payroll Helps Restaurants Handle No Tax On Tips and Overtime

At Horizon Payroll, we support restaurant operators with payroll that’s built for real-world hospitality workflows. Our restaurant support includes:

• Payroll software setup that separates and tracks tip and overtime earnings in the way your reporting requires

• Guidance on connecting POS and payroll data so tip reporting stays clean

• Manager and staff training so employees understand what they’re seeing on pay stubs

• Ongoing compliance updates as IRS guidance evolves

• Dedicated support for W-2 preparation and year-end reporting strategy

The goal is simple: keep your payroll accurate, keep your compliance tight, and keep your managers focused on serving your guests, not stuck back in the office on the computer.

Final Thoughts: Looking Ahead

The “No Tax on Tips or Overtime” provision is one of the most impactful policy changes the restaurant industry has seen in decades. It offers real financial benefits for workers but brings added responsibilities for employers.

Fortunately, 2025 gives restaurant owners a penalty-free window to update their systems, train their staff, and work out the kinks. But by 2026, the rules get real, and the cost of getting it wrong can be expensive.

At Horizon Payroll Solutions, we’re here to help you stay compliant, support your team, and simplify the complexity of payroll. Because when your systems run smoothly, your team can focus on what they do best: serving guests and growing your business.

Ready to make the switch or optimize your payroll strategy? Contact Horizon Payroll today and let’s build a plan that works for your restaurant.

This article is for general information only, not legal, financial, or accounting advice. Laws vary by state and industry, so it’s important to confirm details with legal counsel and your state labor agency.