Key insights
- New tax legislation introduces important changes affecting restaurants, particularly regarding employee tax deductions for tips and overtime pay, and modifications to business' 1099 reporting requirements.
- On their information reporting, restaurants will be required to provide the amount of qualified tips, the occupation of the tipped employee, and the amount of qualified overtime to their employees or other service providers.
- Starting in 2026, the Form 1099 threshold for non-employees rises from $600 to $2,000, adjusted annually for inflation. This change potentially reduces paperwork and eases record-keeping burdens for restaurants.
New legislation presents strategic tax planning opportunities.
Some changes stemming from the new tax legislation in the One Big Beautiful Bill Act are especially relevant to the restaurant industry. These include new deductions related to tips and overtime, as well as adjustments to 1099 reporting thresholds.
By understanding these changes, individuals and businesses can better plan their tax strategies and manage compliance effectively.
New deductions for tips and overtime
The new tax deductions for tips and overtime mark a significant change under the recent tax legislation. These deductions, each worth up to $25,000, are available for employees to take on their personal returns from 2025 through 2028 and do not require itemizing.
Qualified tips
The tips deduction is available for “qualified tips,” which are voluntary cash or charged tips received in occupations that customarily and regularly received tips before this year. This provision is potentially beneficial for servers, bartenders, and other front-of-house restaurant staff whose income typically relies heavily on gratuities.
The IRS is expected to release a list of qualifying occupations, providing clarity for employers and employees.
Qualified overtime compensation
The new law established a new deduction for qualified overtime compensation — another potential win for hourly restaurant employees. “Qualified overtime” covers the overtime premium required by the Fair Labor Standards Act (FLSA), focusing on the extra half portion of time-and-a-half pay.
Workers can deduct up to $12,500 per year ($25,000 for joint filers) of qualified overtime pay.
Both the deductions for tips and overtime are subject to phase-outs for single individual taxpayers earning over $150,000 ($300,000 married-filing-jointly) annually.
Employee training on reporting tips
This new tax law could provide much-needed financial relief for many restaurant employees, potentially leading to increased job satisfaction and retention. Make sure your employees are well informed about the changes, especially those related to tips and overtime pay. Regular training sessions and clear communication can help them understand how the changes may affect them and what they need to do to comply with the new regulations.
Technology requirements
Although tips and overtime continue to be reportable as taxable income to employees and subject to employment taxes, restaurants may need to update payroll and accounting systems and adjust their reporting to accurately disclose these amounts to employees and service providers. This can help streamline the process and reduce the risk of errors. Additionally, investing in technology that tracks tips and overtime accurately can be beneficial.
These provisions are effective beginning January 1, 2025, so employers will need to provide this information retroactively. Transitional guidance is expected later this year to help businesses adapt to these changes.
Increased 1099 reporting threshold
Another significant change impacting the restaurant industry is the increase in the threshold for reporting payments on Form 1099 starting in 2026.
Under previous law, restaurants were required to issue Form 1099-NEC or 1099-MISC for cumulative payments of $600 or more made to non-employees — such as freelance marketing consultants, cleaning services, entertainment providers, or repair technicians. This threshold had remained unchanged for decades and created a significant administrative burden, especially for small and mid-sized establishments.
Starting in 2026, the threshold increases from $600 to $2,000 and will adjust annually for inflation. For restaurants, this means fewer 1099 forms to manage, which can simplify record-keeping and reduce paperwork. However, it’s important to continue tracking all payments to enable compliance with tax regulations.
How CLA can help your restaurant with tax planning
With a window of opportunity for strategic planning, taxpayers and businesses can enhance their tax strategies to remain compliant and potentially reduce their tax burdens. Acting now to plan and adjust can enable a smoother transition when these provisions come into effect.
CLA’s hospitality industry professionals can help you and your employees understand how the new legislation may affect your specific circumstances, providing clarity and actionable strategies to enhance potential tax benefits.