What the “No Tax on Tips” Law Means for Your Workers’ Comp Premiums

If you run a small business in Florida’s hospitality, service, or entertainment industries, you’ve probably known about the new “No Tax on Tips” law signed on July 4, 2025. It’s a federal tax change that lets employees deduct up to $25,000 in qualified tip income from their federal taxes between 2025 and 2028.

It’s a win for your team, but here’s the catch: it doesn’t change how you handle payroll or workers’ comp reporting.

Here’s how this law works and what doesn’t change.

What Is the “No Tax on Tips” Law?

This law allows employees in one of the 68 occupations identified by the IRS, primarily in tipped roles, like servers, bartenders, stylists, delivery, valets, and casino workers, to deduct a portion of their voluntary, reported tips from their federal income taxes.

To qualify, tips must be:

• Voluntarily given by customers or through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.

• Paid in cash, card, digital form such as mobile payment application readily exchangeable for a fixed amount in cash.

• Properly reported to the employer or IRS

What doesn’t count?

• Mandatory service charges (like auto-added gratuities)

• Pre-negotiated or required payments

• Non-cash items like gifts or tickets

Key IRS Reporting Rules for 2025

Employees can only deduct qualified tips (voluntary tips only).

Employers must track and report qualified tips on Form W-2; employees may only deduct the amount shown there.

No W-2 update for 2025; a revised form will be released in 2026, so the IRS suggests employers may report cash tips

in Box 14 or on a separate statement; employees can use that amount for deductions.

• If not reported in Box 14, employees can determine qualified tips using:

o   Box 7 (Social Security tips) on Form W-2.

o   Tips reported on Form 4070 or a similar substitute.

Does This Change Workers’ Comp Reporting?

No.  Even though employees get a tax break, you still have to report tip income when calculating workers’ compensation premiums.

Here’s what stays the same:

• Reported tips are part of gross wages

• Tips are still subject to Social Security, Medicare, and payroll taxes

• You must include tips in your workers’ comp payroll totals

Florida Workers’ Comp Rules Still Apply

In Florida, workers’ comp premiums are based on total payroll, which includes:

• Hourly wages

• Overtime

• Bonuses and commissions

• Reported tips

So even if your employee deducts their tips on their tax return, you still need to count those tips when reporting payroll to your insurance carrier.

What You Should Do as an Employer

The “No Tax on Tips” law is great news for employees, but it doesn’t change your responsibilities as an employer.

1. Continue tracking and reporting all tip income accurately.

2. Educate your employees about the difference between tax deductions and payroll reporting.

3. Work with your workers’ comp insurance agent to ensure your payroll data is complete and compliant.

Including tip income in your workers’ comp payroll calculations is still required under Florida and Federal laws. Accurate reporting isn’t just a requirement; it directly affects your workers’ comp premium costs.

Need help navigating this change? 

Work Comp Associates, Inc. is here to guide you through workers’ comp compliance and cost-saving strategies. Contact us today for a free quote.

📞 Contact Information:

Phone: (561) 500-3592

Email: Mail@WorkCompAssociates.com

Hours: Monday–Friday, 9:00 AM – 12:00 Noon & 1:00 PM – 4:45 PM (Eastern Time)