Tip Deductions

[SCswede]

My grandson works as a tax preparer in a Deli/restaurant and gets paid a hourly wage plus a "promised tip" fixed amount per hour worked. All tips both cash and credit card from customers are collected by the owner.

His hourly wage and promised tip amounts are shown separately on his paystub and both are included in his W-2 as earnings which is taxed for both FICA and Medicare purposes. Does this tip earnings qualify as a reduction to earnings on his tax return per the OBBB? Thanks.

[Opus 17]

Probably Not.  Tips must be voluntary by the customer.  For example, if a restaurant charges an automatic tip on large groups, those automatic tips are not deductible even though tips on smaller groups would be deductible. 

If your grandson works in the back of the house and gets a tip share based on customer voluntary tips, that would be deductible, as would any cash tips handed to him directly by customers (but only if he first reported them to his employer so they would be on his W-2, or he self-reports them on form 4137).

It's not entirely clear if this is really a tip or just a wage under another name, but it does not sound like a voluntary tip as described in the law and regulations.  

[SCswede]

Thanks for the response. I agree that this is a gray area as to if these are tips or another form of wages. Two things make me lean toward these being tips. 

1) If wages, why bother showing wages and tips separately on his check stub? Both are included in his total earnings and pays FICA and medicare tax on these tips.

2) All tips, both cash and on credit cards, from all employees are turned into the owner. It appears the way he distributes tips back to all employee's based on their job category seems to be an attempt to fairly distribute all tips back to the employees in a simplified manner. 

Anyway, I bet this is one of many unusual situations that the OBBB didn't contemplate. Any other thoughts from the community? Thanks again.

[Opus 17]

The problem is with "guaranteed" tips.  

This is the IRS notices that discusses the law, the regulations, and the extra leeway that is given in 2025 because the change happened in the middle of the year and employers might not be prepared for this season.

https://www.irs.gov/pub/irs-drop/n-25-69.pdf

If a restaurant operates where tipping is voluntary, but all tips are paid out as a tip share, that is allowable for the deduction (with the exception of mandatory tips for large parties -- that is something the employer must keep track of).  Where your grandson is in a gray area is because the tips are "guaranteed" -- what exactly does that mean?   Just thinking out loud, it might mean:

1. certain employees are guaranteed a dollar amount, and other employees get a split of what is left over.  If this case, if there is a night of bad tips, does the back of the house crew get their guarantee and the wait staff get screwed?

2. all employees are guaranteed a dollar amount.  In this case, if it is a good night, does the employer keep the extra?  If it is a bad night, does the employer make up the difference?

A "guaranteed" tip sounds like a wage to me.  I don't know why the employer would do it that way.  I can't give you any more practical advice. 

[AmeliesUncle]

As I mentioned in another forum that you posted, did you ask your grandson who is a tax preparer this question?  He should know the answer.

There is no gray area.  Besides being not voluntary, it is NOT a customarily tipped profession and it the business is an SSTB.  That is THREE reasons why it does NOT qualify for the tip deduction.