Dept. of Treasury & IRS Proposed Rule on
"No Tax on Tips"

Published on: 

Disclaimer: This brief is provided by the National Club Association for informational and educational purposes only. It is not intended as legal, accounting, or tax advice, and should not be relied upon as such. Each club’s circumstances are unique, and compliance obligations may vary based on federal, state and local laws. Clubs are strongly encouraged to consult with their legal counsel, tax advisors and accounting professionals before taking any action or making policy changes based on the information contained herein. 

Background & Summary of Key Provisions

On September 22, 2025, the Internal Revenue Service (IRS) proposed regulations to enact changes to the tax code made under the One Big Beautiful Bill Act (OBBBA) that provides an income tax deduction for “qualified tips” that are received during the taxable year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. The proposed rule lists occupations that would be eligible for the new tax deduction and provides a definition of “qualified tips.” This proposed rule is open for public comments until October 22, 2025. 
 
The total amount that an individual can deduct from their income tax may not exceed $25,000 in a taxable year. Furthermore, the deduction amount is based on a taxpayer's modified adjusted gross income. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
 
The proposed rule defines “qualified tips” as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024. Notably, the proposed rule clarifies that to be qualified, the tip must be: 
  • Paid voluntarily without any consequence in the event of nonpayment. 
  • Not the subject of negotiation. 
  • Determined by the payor.  
The term “cash tips” includes tips received from customers that are paid in cash or charged, as well as tips that are received under any tip-sharing arrangements. 

The proposed rule also establishes four factors to determine whether a qualified tip was paid voluntarily. If any of the following factors are absent, the payment must be considered as a service charge and is not eligible for the income tax deduction: 
  1. The payment must be made free from compulsion. 
  2. The customer must have an unrestricted right to determine the amount. 
  3. The payment shouldn’t be the subject of negotiation or dictated by an employer policy. 
  4. The customer has the right to determine who receives the payment.  
The IRS provides the following examples of billing practices used in restaurants to demonstrate when the deduction may be qualified under the “voluntary” definition:  
  1. Restaurant W's menu specifies that an automatic 18% charge will be added to all bills for parties of six or more customers. Customer A's bill for food and beverages for her party of six includes the 18% charge on the “tip line” and the total bill includes this amount. Restaurant W distributes this amount to the waitstaff and bussers. Customer A did not determine the amount of the additional charge, nor was Customer A expressly provided an option to disregard or modify the amount. Customer A did not make the payment free from compulsion. Under these circumstances, the 18% charge is not a qualified tip.
  2. The facts are the same as in the above paragraph, except the bill has a line labeled “additional tip amount.” In this case, Customer A adds on the “additional tip line” an amount equal to 2% of the price for food and beverages. As in the above paragraph, the 18% charge is not a qualified tip. However, the 2% additional amount is a qualified tip, because Customer A voluntarily paid the 2% additional amount without compulsion. 
  3. Customer B dines at Restaurant X with a party of eight people. B's bill for food and beverages for the party of eight includes a “recommended tip” equal to 18% of the price for food and beverages. However, there is a line for the customer to subtract (including to zero) or add to the recommended tip amount before paying the bill. Customer B subtracts 3% from the recommended tip amount resulting in a tip of 15% of the price for food and beverages. Customer B had a right to determine the additional amount, and he was expressly provided the option to disregard or modify the “recommended tip” amount. Under these circumstances, the recommended 18% amount is not a service charge. Rather, the 15% amount that the customer voluntarily paid without compulsion is a qualified tip. 

The proposed rule also includes a list of occupations eligible for the deduction, many of which would be traditionally hired in a private club setting. Below is select list of occupations included in the proposed rule that NCA has identified as particularly relevant for its member clubs:
 
Beverage & Food Service: 
  • Bartenders. 
  • Wait Staff. 
  • Non-Restaurant Food Servers. 
  • Dining Room and Cafeteria Attendants and Bartender Helpers. 
  • Chefs and Cooks. 
  • Food Preparation Workers. 
  • Dishwashers. 
  • Restaurant Host Staff. 
Entertainment & Events: 
  • Locker Room, Coatroom, and Dressing Room Attendants. 
Hospitality & Guest Services: 
  • Concierges. 
  • Maids and Housekeeping Cleaners. 
Recreation & Instruction 
  • Golf Caddies. 
  • Sports and Recreation Instructors. 

Implications for Private Clubs

Employee Eligibility 
Because most clubs prohibit or discourage tipping and use service charges, employees are unlikely to benefit from the new deduction under current models. Caddie, locker and outside services roles that still receive voluntary gratuities may qualify if properly reported. 

Potential Member Expectations 
Members may inquire about tipping policies or expect changes following media coverage. Clubs should clarify that: 
  • The deduction applies to workers, not clubs or members. 
  • It does not reduce service charge amounts or club costs. 
  • Mandatory service charges remain taxable wages and not deductible tips. 
Risk of Misclassification 
Converting service charges into tips to make staff eligible for the deduction poses compliance risks: 
  • Misclassification can trigger IRS penalties and back FICA assessments. 
  • FLSA and state wage laws may apply differently under a tipping model (e.g., tip credit rules, pooling restrictions). 
  • Clubs must also consider bylaws and 501(c)(7) compliance if fundamental compensation policies are altered. 
501(c)(7) Considerations
Changing from a no-tipping to a tipping model may affect: 
  • Member experience and club culture (noncommercial character). 
  • Reporting of member vs. nonmember revenue, if nonmember functions involve tipping. 
  • Documentation standards for payroll and accounting, especially for unrelated business income tracking. 

Payroll, Accounting, and FICA Compliance 

Even under the new law: 
  • Employers must continue to collect, report, and remit FICA and Medicare taxes on all tip income. 
  • Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) remains required for applicable entities. 
  • Clubs using service charges must continue to treat those payments as wages, with standard withholding and reporting. 

Member and Employee Communication Guidance 

Example Member Message 
“The new federal ‘No Tax on Tips’ provision allows certain hospitality employees to deduct tip income from their federal taxes. However, private clubs like ours operate under a service charge model, where payments are distributed to staff as wages. These wages are not considered tips under IRS rules, and the new deduction does not apply. Our approach ensures consistent, fair compensation and compliance with tax and wage regulations.” 

Example Employee Message 
“The ‘No Tax on Tips’ deduction applies to voluntary gratuities that guests choose to give. Because our club uses a service charge system, those payments remain wages and are taxed as before. If you receive voluntary tips (such as for bag or locker services), please continue reporting them so they are accurately recorded for your payroll and year-end reporting.” 

Board & Finance Committee Decision Framework 

Before contemplating any policy change, NCA recommends the following structured analysis: 

Legal & Tax Review: 
  • Confirm IRS definitions and FLSA implications. 
  • Assess risk of misclassification. 
  • Review state and local wage/tipping laws. 
Operational & Member Impact: 
  • Evaluate effect on service culture, member expectations and consistency. 
  • Conduct financial modeling (labor cost, payroll taxes, staff income). 
Governance Review: 
  • Review bylaws, house rules and employee handbook provisions. 
  • Ensure changes align with 501(c)(7) principles of noncommerciality. 
Communications Strategy: 
  • Coordinate staff and member messaging before rollout. 
  • Document rationale for board decisions in meeting minutes. 
 
 
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