No Tax on Tips: What Is Known and What Do We Still Need to Know?

Hey everybody, it's Gene Marks and welcome to this week's episode of the Paychex THRIVE Week in Review. This is where we take a few items from the news this past week and we talk about how they impact your small business and mine.

We're going talk about one item from the news this week. Actually, it was a column that I wrote in the Philadelphia Inquirer, and it focused all on no tax on tips. That is because as we get nearer the end of the year, the no tax on tips legislation that was part of the “big, beautiful bill” that passed in July is now going to come into effect and it will impact some of your workers. I just wanted to bring to your attention some of the things that were highlighted in the column that I wrote so that you as an employer and me, we are prepared to deal with no tax on tips. So, just a few things that I want to make sure that you know.

Number one, the total deduction for tax on tips is $25,000 per year, and it starts phasing out at a certain level of what's called modified gross income. Basically, when somebody starts earning more than $150,000, and tipped income can include cash and credit cards or even any tip sharing arrangements, okay.

Now, also remember not all tips are exempted from no tax on tips. As an employer, you are still required to withhold federal taxes for FICA and Medicare and also state and local taxes may also apply. So, it's really only on federal income taxes.

Also know that certain workers are impacted and certain workers are not. There is a proposed list of jobs that was published. You can find it in an Axios article and we can include that link here in the notes to the podcast, also Paychex also includes it in their analysis of no tax on tips. We'll include that link, as well. But, just bear in mind, these are workers like bartenders and waitstaff and barbers. There are also some unusual ones: home service electricians, plumbers, locksmiths, private event planners. There are actually 68 types of workers that are eligible to not be taxed on up to $25,000 of their tips.

Also, remember that this does not impact your state tip credits. So, if you are paying your workers a tipped wage, which is usually below minimum wage, all those rules still apply and you still have to make up at least the minimum wage if your tipped wage is lower.

Now, when it comes to W-2 forms, your W-2 form is going to change. Not so much this year, but next year. The IRS expected to come out with reporting guidance for employers shortly to handle this year's W-2 form. But starting in 2026, there will be a new W-2 form with a new section available for employers to separately report your tipped amount. So, just be aware that that's also there.

Finally, also know your employees can only really take advantage of this no tax on tips by claiming the deduction on their tax return. So, that means that your withholdings don't change, none of the changes, FICA, employment, your federal wages withheld, federal taxes withheld, but at the end of the year when they file their income taxes, they will be able to claim this deduction against their tipped income. Again, just to reduce their federal income tax. It does not impact their FICA or their Medicare tax.

So, all of this impacts no tax on tips. Now, again, Paychex wrote a very detailed blog on this, which is excellent and not only covers no tax on tips, but also the no tax on overtime wages rule, as well. We'll include a link to that in this podcast. You can look at it more.

But the big takeaways are that there are 68 categories of workers that are eligible for this no tax on tips rules. There are … federal FICA and Medicare taxes are not part of this deduction. Remember as an employer, your reporting requirements will change significantly next year when new W-2 forms come out. The IRS will give you some guidance for this year's reporting soon. And finally, know that your employees can only take advantage of this no tax on tips deduction after the end of the year and when they file their tax returns, then they can take the deduction for up to $25,000 of their tipped income depending on who they are and if they are eligible.

So, that's what you need to know about the no tax on tips rules.

Now, before I let you guys go, guess what I just found out? A little more than one-third of you, 34 % of you to be exact, are spending 10 plus hours a week on HR tasks, including some of you on a recent hot-button topic of dealing with employees for their personal and social media. So. let Paychex, an industry-leading human capital management company, handle your HR, even helping you develop or update your workplace guidance on social media policy, so you can actually, you know, run your business and not worry about this stuff.

If you want some more help from Paychex, visit paychex.com/meetpaychex. That's P-A-Y-C-H-E-X dot-com forward slash M-E-E-T P-A-Y-C-H-E-X. It's meet paychex. Go to paychex.com/meetpaychex.

My name is Gene Mark. Thanks for watching this special edition of the Paychex THRIVE Week in Review. I know we only covered one story this week, but it's a big one. You can see my article in the show notes on the inquiries page, but also you'll be able to get some other links to help you for figuring out the no tax on tip deduction for your employees.

Hope you some good information in this episode. We'll see you next week with more news that impacts your small business and a few bits of advice on how it does. We'll see you then.

Do you have a topic or a guest that you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR payroll benefits or insurance services, see how Paychex can help. Visit the resource hub at paychex.com/worx. That's W-O-R-X. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive.

I'm your host, Gene Marks, and thanks for joining us.

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