No Tax on Tips Explained: Real-World Examples by Industry

The “No Tax on Tips” deduction, as part of the One Big Beautiful Bill, allows tipped workers to deduct qualifying tip income from their federal taxes. Under this provision, millions of tipped workers in industries like restaurants, hospitality, salons, and entertainment can claim a tax deduction when filing their year-end taxes. 

The sections that follow explain how the deduction works, including what qualifies as a tax-deductible tip, and share examples that show how the “No Tax on Tips” deduction plays out in everyday workplace scenarios.

What Qualifies a Tip for the "No Tax on Tips" Deduction?

Not every payment that looks like a tip qualifies for the tax deduction. Under the IRS tip reporting guidelines, the difference between voluntary gratuities and employer-managed payments determines whether the income is eligible for a tax deduction under the new law. 

To qualify for the deduction, tips must: 

• Be paid in cash or a cash-equivalent form, such as a check, credit card, debit card, gift card, or an electronic payment app that transfers cash value. 
• Be received directly from customers, or through a legitimate tip-sharing arrangement (such as a tip pool) among eligible employees. 
• It is voluntarily given by the customer, without negotiation or obligation. 

The IRS makes it clear that automatic service charges (e.g., 18% gratuity automatically added for large parties) do not qualify. This is due to the customer having no choice to adjust or remove that charge; those payments are considered employer-controlled income, not voluntary tips. 

Key Factors That Disqualify a Tip from the "No Tax on Tips" Deduction

• Automatic or mandatory service fees are added to a bill
• Employer controlled 
• Bonuses or extra pay labeled as “tips”
• Non-cash items such as gifts or perks
• Payments are added by the employer rather than the customer. 

The distinction comes down to control. If the customer freely chooses to give the tip, it may qualify for the deduction. If the employer sets the terms, directs distribution, or adds it automatically, the tip does not qualify for the new tax deduction.

Real World Examples by Industry

The “No Tax on Tips” deduction affects many of the most tip-dependent professions and industries. While the new law allows qualified, voluntary tips to be deducted from federal taxes, not every payment labeled as a “tip” meets IRS requirements. 

Below are real-world examples of when tips don’t qualify under the new rule, organized by industry to help employees and employers clearly understand where the boundaries fall. 

Do Restaurant Tips Qualify for the "No Tax on Tips" Deduction? (Servers, Bussers, Hosts)

Most restaurant tips do qualify for the “No Tax on Tips” deduction, but only when they are voluntary, paid directly by the customer, and meet the IRS definition of a qualified tip. Below are examples of qualified and non-qualified tip scenarios for restaurant workers. 

Examples of Qualified Tips

• Customer-chosen cash or credit card tips. Any tip the customer decides to give on their own is a qualified tip because it is voluntary and paid directly by the customer. 

• Employee tip-sharing among roles that customarily receive tips. When servers, bussers, and hosts share customer-paid tips through a voluntary or customary pool, the amounts remain qualified because the IRS recognizes these roles as eligible for this deduction.

• Tips left through mobile payment apps. If a customer uses an electronic settlement method (Square, Toast, etc.) to leave a voluntary tip that represents a cash payment, the tip qualifies for the deduction, as long as the customer has the option to adjust or select “No Tip” on the screen.

Examples of Non-Qualified Tips

• Automatic 18% gratuity added for parties of six or more. Since this charge is mandatory and added by the business, not the customer, it does not qualify. Because guests cannot remove or adjust the amount, it’s a service charge, not a voluntary tip. 

• Employer-controlled tip pool including non-tipped staff. When roles that do not customarily receive tips are included, the payment is no longer qualified. The employer’s control over distribution disqualifies it. 

• Credit card “admin fee” retained by the employer before tipping out staff. The deduction applies only to amounts received by employees. If the employer withholds a portion of the tip, that portion is not a qualified tip.

• A default 20% tip is added to receipts with no option to change. If the customer cannot alter or remove the amount, the payment fails the voluntary requirement and does not qualify for the new tax deduction. 

Do Bartender Tips Qualify for the "No Tax on Tips" Deduction?

Bartenders regularly receive tips, but many policies can turn potential tips into service charges under IRS definitions, which makes them non-qualified tips. 

• Flat 15% service charge for private events or bottle service: Because this is automatically added to the customer’s bill, it’s not voluntary and therefore is a non-qualified tip.
• Prepaid “gratuity” collected at entry (e.g. $5 per person): This payment is made before any service is made and cannot be adjusted, so it’s treated as a mandatory fee, not a tip.
• Credit card terminal with preset tip options and no “no tip” choice: Without the ability to enter a custom amount or decline tipping, the customer lacks full discretion. These payments don’t meet the unrestricted right test and are non-qualified.

Do Hotel Tips Qualify for the "No Tax on Tips" Deduction? (Housekeepers, Porters, Valets) 

Tips are common in hospitality, but automatic charges or bundled fees typically disqualify them under the new deduction. 

• $10-per-night “housekeeping fee” added automatically to guest bills: Because this is required by the hotel, it’s a service charge, not a tip. 
• Mandatory valet charge (e.g., $30 per day) listed on the bill: Since guests have no choice or ability to adjust the fee, it is not voluntary and therefore is a non-qualified tip
• Prepaid “staff service charge” included in a resort fee: The customer never directly pays or decides on the amount, so it fails the voluntary and customer-initiated test. 

Do Salon and Spa Tips Qualify for the "No Tax on Tips" Deduction? (Hairdressers, Barbers, Nail Techs)

Salon and spa professionals often receive a mix of cash and digital tips, but only voluntary, cash-equivalent payments qualify for the deduction. 

• Fixed “gratuity” automatically added to every bill: Since it’s imposed by the salon, it’s a service charge, not a tip. 
• Required $10 tip for all color services: Any stated or enforced minimum tip amount violates the voluntary rule and disqualifies the payment.
• Tips are paid through loyalty credits or store rewards: These are not cash equivalents and therefore cannot qualify as deductible tips under IRS standards.

Do Performer and Entertainer Tips Qualify for the "No Tax on Tips" Deduction? 

Performers may receive tips in person, at venues, or online, but only payments made directly and voluntarily by customers in cash or cash-equivalent form qualify. 

• $5 “performer support fee” added to each ticket: This is automatically charged by the venue, so it’s a service charge, not a tip. 

• Digital tokens or platform-specific coins without a clear dollar value: These are not cash equivalents under the IRS definitions, so they don't qualify for the deduction.

Examples of Other Tipped Roles That May Qualify for the "No Tax on Tips" Deduction? (Miscellaneous/Other Service Roles) 

From gig workers to personal services, the same principles apply; customer control determines whether a tip qualifies. 

• Tattoo shop adds a fixed 15% “artist gratuity” on every invoice: Because the charge is automatic, it’s a service fee, not a voluntary tip.

• Spa auto-charges 18% gratuity regardless of service quality: Customers have no choice to adjust or remove it, making it non-qualified.

• Mechanic receives a coupon or merchandise as a “tip”: Non-cash items fail the cash-equivalent requirement and are not deductible.

Qualified vs Non-Qualified Tips Table

Understanding whether a tip is eligible for the "No Tax on Tips" deduction depends on how the tip was paid and who controlled the payment. The table below outlines common tipping scenarios and identifies whether each one qualifies under current IRS rules.

What the "No Tax on Tips" Policy Means for Employers and Workers

The “No Tax on Tips” tax deduction represents one of the most significant payroll and compliance updates for heavily tipped industries in recent years. 

For employees, this new provision doesn’t change take-home pay; it allows qualifying tipped income to be claimed as a tax deduction when filing taxes. For employers, it introduces new considerations in payroll, reporting, and compliance to ensure eligible tips are properly documented under IRS rules. 

As federal and state agencies continue to clarify implementation, partnering with an experienced HR and payroll provider can help ensure compliance and confidence. CoAdvantage’s experts can guide your business through the details of payroll compliance, tax reporting, and workforce management under the new law. 

Fill out the form below to connect with our team and learn how CoAdvantage can help your business adapt to the new changes under the One Big Beautiful Bill with ease and accuracy. 

**The information provided on this website is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and completeness of the information, we make no guarantees about its correctness, completeness, or applicability to your specific circumstances.  Laws and regulations are subject to change, and you should consult a qualified legal professional before making any decisions based on the information provided here.