Best Practices for Tip Pooling Under the New “No Tax on Tips” Law

Florida employers must act now to avoid compliance missteps

On July 4, 2025, the Big Beautiful Bill was signed into federal law. One of its most high-profile features is a provision allowing employees to exclude up to $25,000 in cash tips per year from federal income tax. While this new tax relief is designed to benefit service workers, it also places a renewed spotlight on employer compliance with tip-related wage laws. The law does not change employer responsibilities under the Fair Labor Standards Act (FLSA) or Florida’s minimum wage laws. In fact, it raises the stakes by increasing scrutiny on how tips are tracked, reported, and distributed.

For Florida employers in restaurants, hospitality, salons, and other service industries, this is the right time to reassess your tip pooling policies, payroll systems, and documentation practices. Poor recordkeeping or unlawful pooling structures can still lead to major wage violations, even under the new tax regime.

What the New Law Changes

The “No Tax on Tips” provision applies to qualifying cash tips received beginning in the 2025 tax year. These tips are now excluded from federal income tax calculations, up to $25,000 per year. This benefit phases out for high earners and only applies to amounts that meet the definition of a true tip under the FLSA. Tips must be voluntary payments given by the customer directly to the employee or through a tip line or mobile app. Service charges and mandatory gratuities are still treated as taxable wages and remain ineligible for the exclusion.

Employers are still required to withhold Social Security and Medicare taxes on all tip income. Additionally, the IRS is expected to issue updated W-2 and payroll reporting guidance, and employers must be ready to implement those changes when issued.

Tip Pooling Rules: Who May Participate

The legality of a tip pool depends on whether the employer claims a tip credit to meet minimum wage obligations. If the employer pays a tipped employee less than the full minimum wage and counts tips toward satisfying the wage requirement, it is using the tip credit. In that case, only employees who customarily and regularly receive tips may be included in the pool. These include servers, bartenders, bussers, and other front-of-house staff who interact directly with customers. Managers and supervisors may never participate in a tip pool, regardless of whether a tip credit is used.

Back-of-house employees, such as cooks and dishwashers, are not permitted to share in a tip pool if the employer is claiming a tip credit. This restriction is enforced under 29 U.S.C. § 203(m)(2)(A) and is clarified in 29 C.F.R. § 531.54. Employers who violate this rule risk losing the tip credit entirely and becoming liable for unpaid wages.

When Cooks and Dishwashers Can Lawfully Share in Tips

There is one important exception that permits cooks and other non-tipped employees to share in pooled tips. Under a 2018 amendment to the FLSA (codified at 29 U.S.C. § 203(m)(2)(B)), an employer may include back-of-house employees in a tip pool only if it does not claim a tip credit and instead pays all employees at least the full applicable minimum wage in direct cash wages. In Florida, that means paying at least $13.00 per hour as of July 2025.

If the employer pays this full wage and complies with other legal requirements, it may establish a tip pool that includes non-tipped employees such as cooks, dishwashers, and food runners. This type of pool must still exclude managers and must be fair and transparent. Employers should carefully document the structure, percentages, and participants in any such arrangement. This rule is summarized in U.S. Department of Labor Fact Sheet #15.

Florida Law and Tip Pooling

Florida generally follows the FLSA when it comes to tip pooling. The current state minimum wage is $13.00 per hour, and the tipped minimum wage is $9.98 per hour if the employer properly applies the federal tip credit. Florida employers who pay employees the full $13.00 in cash wages may use the expanded pooling option that includes back-of-house staff. However, if the tip credit is used to reduce the cash wage below $13.00, then the pool must be limited to customarily tipped workers only.

Additional wage updates are scheduled to take effect on September 30, 2025. Official wage rates and employer notices are available from the Florida Department of Commerce.

Documentation and Notice Obligations

Employers using a tip pool, particularly when claiming a tip credit, are legally required to provide certain disclosures to employees. Under 29 C.F.R. § 531.59(b), employers must inform tipped employees in advance of the amount of the tip credit taken, the direct wage paid, the employee’s right to retain all tips except for valid pooling arrangements, and the general terms of any tip pool. Although the regulation does not require the notice to be in writing, courts and the Department of Labor strongly recommend written documentation. If the employer cannot prove that notice was provided, it may lose the ability to use the tip credit and become liable for back wages.

The best practice is to issue a written tip pooling policy to all affected employees. This should identify who is in the pool, explain how the tips are distributed, and clarify whether the tip credit is being used. Any changes to the structure of the pool or participant eligibility should be documented and shared with employees in advance.

Conclusion

The Big Beautiful Bill offers tax relief for service workers, but it does not reduce the legal risks for employers. In fact, the new law increases the importance of accurate payroll records, clear tip tracking, and lawful pooling practices. Employers in Florida should take this opportunity to review their wage policies, confirm proper use of the tip credit, and ensure that back-of-house employees are only included in tip sharing if all conditions are met.

Failure to follow these rules can result in wage violations, tax errors, and employee lawsuits. Employers who implement clear, legally sound policies today will be better prepared for audits, reporting changes, and continued wage enforcement in the future.