So — Will You Change How You Leave Gratuities?

What is crudely known as the One Big Beautiful Bill Act has been passed by both the Senate and the House of Representatives of the United States and signed by Donald J. Trump — meaning that the campaign promise of no tax on tips will eventually become reality — so will you change how you leave gratuities?

So — Will You Change How You Leave Gratuities?

Workers will be able to deduct up to $25,000.00 in tips and gratuities per year from their taxable income; and gratuities will be taxed by the federal government after that — which at a tax rate of 15 percent, another $3,750.00 is added to the pockets of those workers. If a worker earns greater than $150,000.00 per year, the income that they earn on gratuities will be taxed.

The initial paycheck itself purportedly will not change. Rather, the taxes will supposedly still be withheld up front as they are currently; and the “relief” comes later after the taxes are filed.

This provision is not a permanent change, as it will expire in 2028 unless it is officially extended.

Additionally — in states which charge income tax on earnings — workers will still be required to pay state income taxes on gratuities.

The entire Section 70201 of the bill — which is also known as H.R. 1 — pertaining to no tax on tips is replicated in its entirety with improved formatting after the conclusion of this article for your convenience.

Final Boarding Call

Despite the aforementioned limitations, I still believe that no tax on gratuities is a bad idea for a number of reasons. As I originally wrote back on Sunday, October 13, 2024, “…if the day comes to fruition when gratuities are not subject to taxation, I plan to reduce the amount I tip to service staff — or perhaps dine out less altogether. Why should my taxed dollars support income which is not taxed at all?”

I am neither an endless fountain of cash nor am I an employer of any of these people. How is the fact that servers do not earn a decent wage my fault? I do not operate a restaurant or other dining establishment. I am not the person who purposely sets the prices on the menu artificially low to give the illusion of what is the actual cost of the meal. Why am I required to cover what business owners cannot — or will not — pay?!?

Then again, perhaps I should change the compensation structure of The Gate With Brian Cohen to one that is based on the collection of gratuities in order for me to take advantage of this new law…

…but in all seriousness, the question is: will you change how you leave gratuities once no tax on gratuities becomes effective? If so, please explain how — or if not, please explain why…

All photographs ©2019 and ©2023 by Brian Cohen.

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SEC. 70201. NO TAX ON TIPS.

1. Deduction Allowed.–Part VII of subchapter B of chapter 1 is amended by redesignating section 224 as section 225 and by inserting after section 223 the following new section:

“SEC. 224. QUALIFIED TIPS.

1. 1. “In General.–There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual pursuant to section 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor).
   2. “Limitation.–
      1. “In general.–The amount allowed as a deduction under this section for any taxable year shall not exceed $25,000.
      2. “Limitation based on adjusted gross income.–
         1. “In general.–The amount allowable as a deduction under subsection (a) (after application of paragraph (1)) shall be reduced (but not below zero) by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).
         2. “Modified adjusted gross income.–For purposes of this paragraph, the term `modified adjusted gross income’ means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.
   3. “Tips Received in Course of Trade or Business.–In the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips shall be taken into account under subsection (a) only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions (other than the deduction allowed under this section) allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.
   4. “Qualified Tips.–For purposes of this section–
      1. “In general.–The term `qualified tips’ means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.
      2. “Exclusions.–Such term shall not include any amount received by an individual unless–
         1. “such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor,
         2. “the trade or business in the course of which the individual receives such amount is not a specified service trade or business (as defined in section 199A(d)(2)), and
         3. “such other requirements as may be established by the Secretary in regulations or other guidance are satisfied. For purposes of subparagraph (B), in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual shall be treated as receiving tips in the course of a trade or business which is a specified service trade or business if the trade or business of the employer is a specified service trade or business.
      3. “Cash tips.–For purposes of paragraph (1), the term `cash tips’ includes tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.
   5. “Social Security Number Required.–
      1. “In general.–No deduction shall be allowed under this section unless the taxpayer includes on the return of tax for the taxable year such individual’s social security number.
      2. “Social security number defined.–For purposes of paragraph (1), the term `social security number’ shall have the meaning given such term in section 24(h)(7).
   6. “Married Individuals.–If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.
   7. “Regulations.–The Secretary shall prescribe such regulations or other guidance as may be necessary to prevent reclassification of income as qualified tips, including regulations or other guidance to prevent abuse of the deduction allowed by this section.
   8. “Termination.–No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028.”.
2. Deduction Allowed to Non-itemizers.–Section 63(b) is amended by striking “and” at the end of paragraph (3), by striking the period at the end of paragraph (4) and inserting “, and”, and by adding at the end the following new paragraph: “(5) the deduction provided in section 224.”.
3. Omission of Correct Social Security Number Treated as Mathematical or Clerical Error.–Section 6213(g)(2), as amended by the preceding provisions of this Act, is amended by striking “and” at the end of subparagraph (W), by striking the period at the end of subparagraph (X) and inserting “, and”, and by inserting after subparagraph (X) the following new subparagraph:
   “(Y) an omission of a correct social security number required under section 224(e) (relating to deduction for qualified tips).”.
4. Exclusion From Qualified Business Income.–Section 199A(c)(4) is amended by striking “and” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting “, and”, and by adding at the end the following new subparagraph:“(D) any amount with respect to which a deduction is allowable to the taxpayer under section 224(a) for the taxable year.”.
5. Extension of Tip Credit to Beauty Service Business.–
   1. In general.–Section 45B(b)(2) is amended to read as follows:
   2. “Application only to certain lines of business.–In applying paragraph (1) there shall be taken into account only tips received from customers or clients in connection with the following services:
      1. “The providing, delivering, or serving of food or beverages for consumption, if the tipping of employees delivering or serving food or beverages by customers is customary.
      2. “The providing of any of the following services to a customer or client if the tipping of employees providing such services is customary:
         1. “Barbering and hair care.
         2. “Nail care.
         3. “Esthetics.
         4. “Body and spa treatments.”.
   3. Credit determined with respect to minimum wage in effect.–Section 45B(b)(1)(B) is amended–
      1. by striking “as in effect on January 1, 2007, and”, and
      2. by inserting “, and in the case of food or beverage establishments, as in effect on January 1, 2007” after “without regard to section 3(m) of such Act”.
6. Reporting Requirements.–
   1. Returns for payments made in the course of a trade or business.–
      1. Statement furnished to secretary.–Section 6041(a) is amended by inserting “(including a separate accounting of any such amounts reasonably designated as cash tips and the occupation described in section 224(d)(1) of the person receiving such tips)” after “such gains, profits, and income”.
      2. Statement furnished to payee.–Section 6041(d) is amended by striking “and” at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting “, and”, and by inserting after paragraph (2) the following new paragraph:
         “(3) in the case of compensation to non-employees, the portion of payments that have been reasonably designated as cash tips and the occupation described in section 224(d)(1) of the person receiving such tips.”.
   2. Returns for payments made for services and direct sales.–
      1. Statement furnished to secretary.–Section 6041A(a) is amended by inserting “(including a separate accounting of any such amounts reasonably designated as cash tips and the occupation described in section 224(d)(1) of the person receiving such tips)” after “amount of such payments”.
      2. Statement furnished to payee.–Section 6041A(e) is amended by striking “and” at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting “, and”, and by inserting after paragraph (2) the following new paragraph:
         “(3) in the case of subsection (a), the portion of payments that have been reasonably designated as cash tips and the occupation described in section 224(d)(1) of the person receiving such tips.”.
   3. Returns relating to third party settlement organizations.–
      1. Statement furnished to secretary.–Section 6050W(a) is amended by striking “and” at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting “and”, and by adding at the end the following new paragraph:
         “(3) in the case of a third party settlement organization, the portion of reportable payment transactions that have been reasonably designated by payors as cash tips and the occupation
         described in section 224(d)(1) of the person receiving such tips.”.
      2. Statement furnished to payee.–Section 6050W(f)(2) is amended by inserting “(including a separate accounting of any such amounts that have been reasonably designated by payors as cash tips and the occupation described in section 224(d)(1) of the person receiving such tips)” after “reportable payment transactions”.
   4. Returns related to wages.–Section 6051(a) is amended by striking “and” at the end of paragraph (16), by striking the period at the end of paragraph (17) and inserting “, and”, and by inserting after paragraph (17) the following new paragraph:
      “(18) the total amount of cash tips reported by the employee under section 6053(a) and the occupation described in section 224(d)(1) such person.”.
7. Clerical Amendment.–The table of sections for part VII of subchapter B of chapter 1 is amended by redesignating the item relating to section 224 as relating to section 225 and by inserting after the item relating to section 223 the following new item:

“Sec. 224. Qualified tips.”.

(h) Published List of Occupations Traditionally Receiving Tips.– Not later than 90 days after the date of the enactment of this Act, the Secretary of the Treasury (or the Secretary’s delegate) shall publish a list of occupations which customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1) of the Internal Revenue Code of 1986 (as added by subsection (a)).

(i) Withholding.–The Secretary of the Treasury (or the Secretary’s delegate) shall modify the procedures prescribed under section 3402(a) of the Internal Revenue Code of 1986 for taxable years beginning after December 31, 2025, to take into account the deduction allowed under section 224 of such Code (as added by this Act).

(j) Effective Date.–The amendments made by this section shall apply to taxable years beginning after December 31, 2024.

(k) Transition Rule.–In the case of any cash tips required to be reported for periods before January 1, 2026, persons required to file returns or statements under section 6041(a), 6041(d)(3), 6041A(a), 6041A(e)(3), 6050W(a), or 6050W(f)(2) of the Internal Revenue Code of 1986 (as amended by this section) may approximate a separate accounting of amounts designated as cash tips by any reasonable method specified by the Secretary.