Overview
This article summarizes recent changes to U.S. tax law related to tips and the new “No Tax on Tips” federal income tax deduction (up to $25,000 per year). It also explains where to find Voluntary vs. Involuntary tip totals in foreUP reporting to help support your tax and payroll documentation.
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Key Takeaways
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PLEASE NOTE: This article is for informational purposes only and is not tax advice. For more detailed information, please review the IRS Website or consult with a tax professional.
New Tax Law: Tips vs. Service Charges (Auto-Gratuities)
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, introduced new rules that distinguish between customer-paid tips and mandatory charges when determining whether amounts may qualify for the “No Tax on Tips” deduction.
For tax years 2025 through 2028, the new federal income tax deduction generally applies to qualified tips—tips that meet the IRS definition of a voluntary tip. Eligible employees may be able to deduct up to $25,000 annually (subject to eligibility rules such as filing status and income thresholds).
In general:
- Voluntary tips (qualified tips) may be eligible for the deduction.
- Automatic gratuities / service charges (mandatory charges added by the business) are typically treated as wages and are generally not considered qualified tips.
| Feature | Voluntary Tips (Qualified Tips) | Involuntary Tips / Service Charges (Auto-Gratuities) |
|---|---|---|
| Eligibility for Deduction | May qualify for the federal income tax deduction (up to $25,000 per year, depending on eligibility). | Generally does not qualify; typically treated as wages. |
| Customer Control | The customer chooses whether to tip and how much, with no consequence for not tipping. | Automatically added to the bill (e.g., 18% for large parties), with no clear option to remove or modify. |
| Who Sets the Amount | Determined by the customer. | Set by the business. |
| How It’s Reported | Generally reported as tips (may be reflected on Form W-2 and related tip reporting). | Generally reported as wages through payroll. |
Voluntary vs. Involuntary Tips Report in foreUP
To help your facility review tip totals for tax and payroll purposes, foreUP includes reporting that displays Voluntary and Involuntary tip totals.
These columns are provided to help you categorize tip-related amounts for review with your payroll provider or tax advisor.
How to Run the Report
- Log in to foreUP
- Click on the top-left module dropdown and select Reports
- Click New Reporting towards the top left
- Click Tips from the left column
- Select the Employee Tip Totals report
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Example:
- Once the report loads, adjust the date range to fit your needs
- The report will show Voluntary and Involuntary tips for employees who received tips within the date range selected
FAQ
Tip: Click a question below to expand the answer.
What is a voluntary tip? +
The key factor is customer control.
- Voluntary Tip: The customer chooses whether to tip and how much, with no consequence for nonpayment.
- Involuntary Tip / Service Charge: Automatically added to a bill (for example, 18% for large parties) without an express option for the customer to remove or modify the charge.
What is considered an “involuntary tip” in the Employee Tip Totals report? +
In foreUP, an amount is categorized as an involuntary tip when a tip is added through the Auto Gratuity feature on an F&B sale, and the “Make Auto Gratuity a Service Fee” setting is NOT enabled.
Specifically:
- Go to Settings > Sales > Food & Beverage
- If Auto Gratuity has a value (example: 20%)
- AND Make Auto Gratuity a Service Fee is unchecked
- Then, when auto gratuity is applied to an F&B tab, it will be reported in foreUP as an involuntary tip
Note: Your accounting or payroll provider may classify automatic gratuities differently for tax purposes. We recommend reviewing this setup with your tax professional or payroll partner.
If you have any additional questions, please contact our Support Team at support@foreup.com!