Starting January 1, 2025, tipped employees across the U.S. saw a major shift in how their income is being taxed. The new “No Tax on Tips” policy eliminates federal income tax on tips, creating the potential for larger tax refunds and, as of 2026, bigger paychecks. While the headline seems straightforward, the details of how the policy works and what it means for workers, restaurant owners and the industry overall warrant a closer look.
The new rule doesn’t remove taxes at the time someone earn tips. Instead, it functions as a federal income tax deduction, meaning employees still report tips and still have taxes withheld throughout 2025. But when they file their 2025 federal tax return in early 2026, those tip earnings won’t count toward their taxable income. For many tipped workers, that will translate into a hearty refund check from the IRS.
In plain terms, during 2025, employees are still paying federal income tax on their tips, but they’ll get that money back after filing taxes. In 2026 and beyond, they will be able to adjust their withholdings so less tax is taken out of their paycheck in the first place.
It’s important to note this only applies to federal income tax. FICA taxes, which includes Social Security and Medicare, are still required. In Georgia, the state legislature did not approve any changes to the state tax code last session, so state income taxes on tips remain in place. That means workers will still see a portion of their tip income taxed at the state level.
For most servers, bartenders and other tipped employees, this is potentially a game-changer. Since tips often make up the majority of their pay, excluding that money from federal income tax can mean a sizable refund.
“For employees, it will allow them to get a check back on their federal taxes that could be substantial if they are a high earner,” says Jay Bandy, President of Goliath Consulting Group, an Atlanta-based restaurant consulting firm.
As you can guess, the immediate reaction among most servers has been excitement. “Funny, I’ve heard no complaints,” says Bandy. “I expect they are planning late winter trips now with the Federal Income Tax check they are going to get.”
On the employer side, there may be benefits as well, with the hopes that this new policy helps attract and retain staff, which is something restaurants have grappled with immensely since the COVID pandemic.
“It may help with recruiting servers in restaurants struggling with making a reasonable amount of tips for the work they do,” says Bandy.
There’s also a flip side to consider internally for the food and beverage industry, according to Bandy. If front-of-house (FOH) tipped staff are suddenly pocketing much more take-home pay, the wage discrepancies between FOH and back-of-house (BOH) employees (cooks and dishwashers) will grow even more glaring. Since this is already a sore spot in many restaurants, where BOH workers earn hourly wages without the cushion of tips, it is worthy of consideration, he noted.
While the overall news has been received positively, there’s also some confusion among workers who don’t fully understand when the change takes effect or what types of taxes it applies to. Some employees mistakenly believe they no longer owe FICA contributions or that state income tax is included in the deduction. Others confuse a deduction with a credit, assuming the money will come back dollar-for-dollar. The reality is more nuanced, and clear communication will be key as the first tax season under the new rule approaches.
Interestingly, not all restaurant owners are even aware of the upcoming change. For those who are, many view it favorably, expecting to themselves pay fewer payroll taxes and gain a new employee “perk” to highlight during hiring. “Most restaurant owners are happy with any policy that reduces taxes and can be pushed as a benefit for employees,” says Bandy.
The first year of implementation (2025) may be a little clunky. Employees will continue to see taxes withheld from their checks, only to get them back the following year. But by 2026, payroll systems and withholdings should catch up, and the benefit will be felt in real time with each paycheck. That’s when workers may truly feel the impact and when the industry will start to see how the policy affects labor markets, staffing dynamics and the already-complicated issue of pay equity in restaurants.
The first year of implementation (2025) may be a little clunky. Employees will continue to see taxes withheld from their checks, only to get them back the following year. But by 2026, payroll systems and withholdings should catch up, and the benefit will be felt in real time with each paycheck. That’s when workers may truly feel the impact and when the industry will start to see how the policy affects labor markets, staffing dynamics and the already-complicated issue of pay equity in restaurants.
Dionne Passacantando is a writer and content creator for Rocky Mountain Food Report. Her online publication and social media presence focuses on food, beverage, travel and hospitality. She lives in Colorado Springs with her husband and three children
