The new “no tax on tips” rule allows eligible tipped workers to deduct up to $25,000 of qualified tips from federal taxable income for tax year 2025 (filing in 2026) and subsequent years through 2028.

Creating Tipped Employees

1. Go to Payroll Options tab under Employees > Employee Setup. An employee can be tipped both directly and indirectly, if applicable.

   • Direct tips are tips the employee receives directly from the customer, without the employer controlling who gets them. An example is cash handed directly to a server.

   • Indirect tips are tips received from a tip pool or indirectly because of the customer’s tip but not given directly to the employee by the customer. An example is when a busser gets a share of the server’s tips through tip pooling.

   

2. Select the tipped code from the Treasury Tip Code drop list. In some situations, an employee may work in a different position at another location. After selecting the alternate location, choose the appropriate treasury tipped code for that position. See Drake Accounting - Multi-Location Employee Payroll for more information on how to enter multi-locations for employees.

3. Once you have the employee set up as a tipped employee with the tip code selected, click Save.

4. Then go to Employees > Payroll > Live or Employees > Payroll > ATF. Select the employee and enter the applicable direct or indirect tips.

5. At the end of the year, the tipped code will show on Form W-2.

Additional Information

• List of occupation codes

• IRS guidance on no tax on tips

• Tips vs. Service Charge

Related Links

Drake Accounting - Qualified Overtime Compensation ("No Tax on Overtime" Provision)

Drake Tax - New Tax Bill