No Tax on Tips: What Texas Employers Need to Know

Only customarily and regularly tipped occupations qualify for the federal tip deduction. In late 2025, the IRS released guidance identifying eligible occupations across multiple job categories, which include all of the following:

• Beverage and Food Service – Wait Staff, Food Servers, Host Staff, Food Preparation Workers, etc.

   

• Entertainment and Events – Musicians & Singers, Dancers, Entertainers and Performers, Gambling Dealers, Gambling and Sports Book Writers & Runners, etc.

   

• Hospitality and Guest Services – Concierges, Baggage Porters & Bellhops, Hotel, Motel, & Resort Desk Clerks, Maids & Housekeeping Staff, etc.

   

• Home Services – Home Electricians, Home Plumbers, Home HVAC Mechanics & Installers, Home Maintenance & Repair Workers, Home Landscaping & Groundskeeping Workers, etc.

   

• Personal Services – Private Event & Portrait Photographers, Private Event Videographers, Private Event Planners, Event Officiates, Personal Care & Service Workers, Nannies & Babysitters, Tutors, etc.

   

• Personal Appearance and Wellness – Massage Therapists, Barbers, Hairdressers, Hairstylists & Cosmetologists, Manicurists & Pedicurists, Skincare Specialists, Exercise Trainers & Group Fitness Instructors, etc.

   

• Recreation and Instruction – Travel Guides, Tour Guides & Escorts, Sports & Recreation Instructors, etc.

   

• Transportation and Delivery – Taxi & Rideshare Drivers and Chauffeurs, Shuttle Drivers, Private and Charter Bus Drivers, Shuttle Drivers, Goods Delivery Workers, etc.

A full list of the jobs that qualify for the new federal tip deduction is available online, published by the Department of the Treasury with occupation descriptions and illustrative examples to clarify who is eligible.

Remember that jobs eligible for the “No Tax on Tips” federal tip deduction are not necessarily eligible for a “tip credit” arrangement (paying a cash wage below minimum wage), which is governed by the Fair Labor Standards Act (FLSA) and uses its own distinct criteria.

Qualified tips are voluntary tips – categorically different from mandatory service charges and automatic gratuities. 

According to IRS guidelines, for an employee to qualify for the federal tip deduction, they must work in an eligible tipped-wage industry and occupation and their qualified tips must meet the following criteria:

• Paid in cash or an “equivalent medium” like debit card, credit card, check, etc. Non-cash gifts like tickets or merchandise do not count as qualified tips.
• Received from customer(s) or through a voluntary or mandatory tip-sharing system like a tip pool. Bonuses or incentive pay do not count as qualified tips.
• Distinct from mandatory service charges and automatic gratuities, particularly if these charges are added without an opportunity for the customer(s) to modify the amount or recipient(s).

Service Charge vs. Tips

Employees must accurately report any voluntary tips received through tip sharing each month to qualify as tips. In contrast, mandatory service charges or fixed amounts charged by employers are taxable wages and do not qualify as tips.

Despite changes to employee deductions through the “No Tax on Tips” provision, for employers, tips must still be accurately tracked, reported, and included on employee W-2s.

Likewise, FICA taxes (Social Security and Medicare taxes) still apply and must be correctly withheld per employee. According to IRS guidelines, any qualified tips of $20 or more each month must be reported by the employee and withheld by the employer for FICA taxes as they are considered wages.

Although the qualified tips deduction impacts an employee’s individual reporting, Form 8027 employer filing expectations – required to report tips, receipts, and to designate allocated tips – are still in place for most employers.

The Importance of Accurate Payroll Systems

Whether it’s determining an employee’s eligibility for “No Tax on Tips” deduction benefits, accurately reporting and withholding qualified tips, or simplifying POS and tipping processes for your business, Affiliated HR & Payroll offers the tools and expertise to keep your operations seamless and compliant.

Our Payroll Tax Management services ensure timely and accurate reporting, withholding, and filing, all while helping your business avoid fines and stay fully compliant with local, state, and federal regulations. 

Tired of issues with your POS data or inefficient payment and tipping processes? Our customized POS Interfaces for Restaurants, Hospitality, and Tipped Industries offer error-free data transfer from your POS software into our payroll system, alongside essential reporting features. Our POS interface also helps your business separate qualified tips from non-qualified gratuities and simplify tip allocation calculations.

The “No Tax on Tips” provision of the One Big Beautiful Bill provides federal guidelines for employee reporting and tax filing, but it’s crucial for Texas employers to remember state-specific tip laws, especially regarding tip pooling and tip credits.

Navigating No Tax on Tips in Texas

Although tip pooling is allowed in Texas, a tip pool can only benefit customarily tipped employees and should not include owners, managers, or supervisors. Other back-of-house staff are excluded from the business’ tip pool if the employer uses a tip credit for those employees. Only if all employees are paid minimum wage are all staff eligible for the tip pool, but none of the tips can be withheld by the employer and contributions for the pool should be based on reasonable, pre-determined percentages.

Again, when reviewing an employee’s eligibility for “No Tax on Tips” federal deduction, this should be evaluated separately from tip credit eligibility, which is dictated by FLSA regulations. For more guidance on adhering to Texas-specific regulations, explore our Texas Business Payroll & HR Guide.