The rules governing federal income taxes change constantly. When new tax regulations apply to different industries, businesses and workers need to understand how to ensure they remain compliant with federal income tax regulations. Misunderstandings about the law can lead to tax issues that can produce significant financial consequences.
For example, workers paid on a tipped basis, meaning that they receive gratuities for the services they provide, have previously needed to pay federal income tax on all of their reported tips and gratuities. However, the income tax rules that apply to tipped workers have changed with the passage of the One Big Beautiful Bill Act (OBBBA).
The new rules allow tipped workers to deduct up to $25,000 in gratuities from their reportable income for income tax purposes every year. However, tipped workers and their employers need to ensure they recognize the critical distinction between bonuses received based on a mandatory service charge and voluntary gratuities under the OBBBA.
What is a bonus for a tipped worker?
Generally speaking, any gratuities left voluntarily by customers constitute tips. As previously mentioned, workers can now deduct up to $25,000 worth of tips provided in cash or on credit card transactions every year.
However, they may need to report any bonuses or compensation received based upon service charges assessed by their employers as taxable income. Many businesses, particularly restaurants, impose a mandatory service charge either across the board or for large parties. If a group of eight or more comes into a restaurant, for example, there may be an automatic 15% service charge applied to the bill.
The employer may then pass some or all of the money derived from the service charge to the server or other staff. Those funds constitute a bonus, not a tip, as they are a form of revenue-sharing with the employee based on mandatory charges imposed on the customer. It is not a freely-given gratuity.
Tipped workers may need to keep very thorough personal records to ensure they properly report and pay taxes on any bonuses received due to an employer’s service charge, while reasonably deducting the gratuities voluntarily provided by customers. Likewise, employers in the service sector will also need to maintain thorough records to ensure that they accurately report the nature of workers’ pay to the Internal Revenue Service (IRS).
Ensuring compliance with tax laws can be important for workers in service-based jobs and for those managing such workers. Tipped workers and those who own or operate gratuity-based businesses may need assistance tracking changes to income tax laws and remaining compliant, and that’s okay. Seeking personalized legal guidance is a good way to get started.