2025 Tip Tax Changes for Spas: What’s New and How to Stay Compliant

If your spa accepts tips, 2025 marks the most significant change we’ve seen in years. A new federal law introduces a temporary deduction for reported tips and expands certain employer payroll tax credits to beauty and personal care businesses. Great news—if you’re documenting correctly. 

In this post, we’ll break down what’s new, who qualifies, what to do next, and the cleanest way to keep your spa compliant without creating busywork.

*This article is for educational purposes only and not tax or legal advice. Always consult your CPA or tax attorney about your specific situation.

1) A new federal tip deduction for eligible employees (2025–2028)

For the 2025–2028 tax years, eligible workers in occupations that “customarily and regularly” receive tips may deduct up to $25,000 in reported tips from federal taxable income each year. (If self‑employed, the deduction is limited to the net income from the business where the tips were earned.) The deduction phases out at higher incomes; most guidance points to a phase‑out beginning around the $150,000 range for single filers (with a higher threshold for joint filers). Exact thresholds and definitions are subject to Treasury/IRS guidance.

Key implications for spa teams:

• This is a deduction (not a credit), so it reduces taxable income—not dollar‑for‑dollar tax owed.
• Reported is the operative word. Unreported tips won’t qualify.
  

State taxes: Your state may not mirror the federal rules; check with your CPA.

2) An expanded employer payroll tax credit on credit/debit‑card tips

Historically, restaurants could claim a FICA tip credit that offsets part of the employer’s share of payroll taxes on employees’ reported tips. In 2025, that framework was expanded to include beauty and personal care businesses (salons, spas, barbershops). This is a significant cash-flow relief for owners who process card-based tips through payroll.

What this means for owners:

• If you process tips through payroll and employees report tips accurately, you may be able to reclaim part of the employer payroll tax paid on those tips.
• You’ll need clean reporting that ties out to payroll records.
• Your CPA will determine filing specifics and whether you qualify.

Bottom line: Both provisions reward spas that report tips accurately. The fastest path to compliance is to centralize tipping, payout, and reporting in one system.

Employer side (spa owner)

You may qualify for the payroll tax credit if:

• Your business is a salon, spa, med spa, or similar beauty/personal care employer with tipped employees.
• You process and report employees’ tips through payroll.
  

You keep auditable records that reconcile POS/PMS tip logs to payroll and bank deposits.

You don’t need a bigger back office—you need a clean, repeatable system. Here’s a five‑layer setup we recommend to Growth Factor® members:

1. Centralize tipping
   Use one workflow for all tipping: a kiosk or POS‑integrated screen that presents suggested tip options and assigns tips to specific providers.
2. Automate deposit & payout
   Tips should route directly to provider accounts (typically next business day) while creating a paper trail for payroll and taxes.
3. Lock in reporting
   Generate daily and pay‑period reports showing: ticket #, service provider, gross tip, card/cash indicator, date/time, and payout status. Save PDFs to a monthly “Tip Reporting” folder.
4. Reconcile to payroll
   Match POS/PMS tip totals to payroll journal entries every cycle. Resolve discrepancies before submitting payroll.
5. Document policies
   Create a 1‑page Tip Policy (who can accept tips, how they’re processed, reporting timelines, and staff responsibilities). Acknowledge during onboarding.

If that sounds like a lot, this is exactly where Tippy shines—hardware + software designed for beauty businesses, with built‑in reporting, next‑day payouts, and card‑based tip options that providers and clients actually prefer.

Front desk script (60 seconds)
“After your service, you’ll see a gratuity screen at checkout. It lets you leave a gratuity for your provider directly; gratuities usually reach them the next day, and you’ll receive your emailed receipt. If you prefer cash, that’s fine too—we’ll make sure it’s recorded so your provider gets full credit. Any questions for me?”

Use this 3‑phase plan to get compliant before the busy season hits.

Phase 1 — Decide & document (Week 1)

• Choose one tip platform (we recommend Tippy).
• Publish your Tip Policy (acceptance, processing, reporting, audit).
• Create a Tip Reporting folder with subfolders by month; save daily PDF reports.

Phase 2 — Integrate with payroll (Week 2)

• Map tip types (card vs cash) to your payroll codes.
• Confirm who enters tips (front desk vs providers) and when (end‑of‑day).
• Run a mock payroll to validate the reconciliation.

Phase 3 — Train & monitor (Week 3)

• Host a 30‑minute team training on the new law + your policy.
• Add a weekly checklist: confirm deposits, reconcile to payroll, file reports.
  
• Review tip averages and show any lift to keep morale high.

Is there an income limit?
Yes. The deduction phases out at higher incomes (thresholds vary by filing status). Most guidance points to phase‑outs beginning around $150,000 for single filers and higher for joint filers. Your CPA will apply the current IRS rules for your return.

Will my state match the federal rules?
Not necessarily. States set their own income tax rules; many won’t mirror the federal deduction. Confirm with your tax professional.

What records should I keep?

• Daily tip reports from your tipping system/POS
• Payroll journals showing tips processed
• Bank deposits (and payout confirmations)
• Staff acknowledgments of your Tip Policy
  

How do I talk about this with my team?
Host a short huddle to explain the why (more take‑home pay for providers, cleaner reporting, easier tax prep) and the how (exactly when and how tips are recorded). Reinforce that accurate reporting protects everyone.