But the deduction starts to phase out for higher- income earners. Starting with single-filers who make $150,000 or more annually (or $300,000 for couples filing jointly), the deduction starts to phase out. Not all taxes on tips are going away. The One Big Beautiful Bill, as it is named, only reduces federal income tax on tipped income. Workers and employers will still need to pay payroll taxes that go to Social Security and Medicare, for example. And it’s not clear how state income taxes will be impacted. Kirsner said most states tie their income taxes to the federal system, but states make their own rules (some states don’t even have an income tax). It remains to be seen whether they will conform fully (or in part) with this legislation. Workers must have a social security number to benefit. To be eligible for the deduction, workers must have a social security number. Those with a tax ID—which includes some non-resident aliens— are not eligible. The deduction applies to all tips (with a caveat below). Tipped income paid in cash or by credit card qualifies for the deduction, Kirsner said. It also applies to tips earned through a tip-sharing program. What’s not clear, however, is whether back-of-the- house workers could claim the deduction, Kirsner said. That’s because back-of- the-house-workers may not be considered among those customarily in the line of service, so employers may need to wait on guidance to answer that question. Parker added that he expects to see more litigation over tip pooling as a result of the tax bill. “We might see employees scrutinize tip pools more closely because there’s money at stake that they might not get charged taxes on,” he said. “I think more and more servers are going to see the enormous benefit they could get.” But not all gratuities may qualify (The caveat). The deduction only applies to tips given “voluntarily.” That means a service charge or any automatic gratuity applied to larger groups or catered events would not be eligible for the deduction.
“The amount (of the tip) has to be determined by the payor,” said Kirsner. But that still leaves a gray area. There could be situations the IRS might consider a tip ineligible if there’s an element of “negotiation,” he said. A restaurant, for example, might add a suggested tip to the bill, allowing the guest to customize the amount or take it off. Would that be considered a negotiation? “We don’t know,” he said. And a warning. The deduction, of course, applies only to tips reported as income. Workers who might “forget” to report cash tips for tax purposes should be aware the IRS will, no doubt, pay attention to shifts in reported tipped income after the No Tax on Tips benefit ends. If that tipped income suddenly drops or disappears, it could be a red flag.
HOSPITALITY NEWS JUL | Page 39
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