John Elkhay, co-owner of the restaurant company Chow Fun Inc., is no stranger to navigating regulatory curveballs.
With his company managing more than 200 employees across popular Providence establishments – including Ten Prime Steak & Sushi, Xaco Taco, Oz Tacos & Tequila, and two Harry’s Bar & Burger locations – he understands that the changing regulatory landscape demands thinking on your feet.
The latest change came with the recent enactment of federal legislation known as the One Big Beautiful Bill Act in July, which included a provision allowing workers and self-employed individuals to deduct up to $25,000 in qualified tips for any taxable year.
Elkhay fully supports the “no tax on tips” law, viewing it as a potential recruitment tool in an unpredictable industry, often plagued by high turnover and narrow profit margins, by alleviating some of the tax burdens.
But the change also has the potential to create confusion among taxpayers and tax preparers over who qualifies and whether it will be advantageous to take a standard deduction or itemize deductions.
For his part, Elkhay says he’s trying to provide clarity to his employees about tax issues, but he also relies on his own tax advisers and accountants due to the intricacies involved.
The IRS estimates that only about 45% of tips are reported on tax filings. But other organizations put that number at 60%. “This change could lead employees to report more tips, while also improving their eligibility for loans and mortgages by showing income receipts,” Elkhay said.
Even though the IRS listed which tipped workers – including servers, bartenders and back-of-the-house staff, even content creators and caddies – qualify for the deductions, the implications for 2025 filings and payroll practices remain hazy for many.
In anticipation of the federal budget bill, the General Assembly “decoupled” the state from any changes to the federal tax code that could negatively affect state revenues. That means that tips will remain fully taxable at the state level, according to the R.I. Division of Taxation.
In an attempt to resolve a wide range of questions about the tax changes, Tax Administrator Neena S. Savage said, the division has been meeting with tax professionals such as the Rhode Island Society of Certified Public Accountants since October and will continue throughout November and December, and into 2026.
The legislature also convened an advisory committee made up of union representatives and the R.I. Public Expenditure Council, among others, charged with conducting a study and weighing options for which amendments to future federal tax laws the state should conform to.
That report is set to be released in the coming weeks.
Savage said the changes themselves had been less of a problem than “the method and manner” in which they were handed down, with ever-shifting due dates and late-arriving guidance advisories.
“It has been challenging for all of us,” she said. “I wouldn’t say it’s been chaotic. There are aspects we are responding to. And it hasn’t only been a challenge for us; on practitioners as well, and business owners who must spend resources keeping up and see how their tax profile is impacted by these changes.”
Since the 2017 Republican tax overhaul was made law under the first Trump administration, Savage said tax administration “for the entire ecosystem is becoming more complex.”
It’s getting more complex for Ashley Surber, a self-employed esthetician and small-business owner based in Middletown.
She had to do some research about the new tips exemption, and she still has questions.
“Any money I don’t have to give to the government sounded like good news to me,” Surber said. “I’d rather give [my money] to my kids.
“From what I understand, it would not be worth writing off my tips instead of taking the standard deduction,” she said. “And I’m not sure if it affects my business taxes.”
The Yale Budget Lab has reported that about 37% of tipped workers already had incomes low enough that they paid no federal income tax in 2022. And the Tax Policy Center estimates that about 60% of households reporting tipped income would benefit if a full-tip deduction were available.
Many in the local hospitality sector have been supportive of a “no tax on tips” law.
Farouk Rajab, president of the Rhode Island Hospitality Association, wrote an op-ed in the spring that said removing the federal income tax on tips would allow employees to keep more of what they earn, an improvement in a system that allows employers to pay a lower base wage to tipped workers.
“Recruitment and retention continue to be a challenge for many operators,” he said. “And improving take-home pay without increasing the financial burden on businesses is a smart, balanced step in the right direction ... value in recognizing that tipped income is not discretionary; it is a core part of how employees are paid. That kind of predictability matters.”
But in today’s climate, not much is predictable.
A review of the comments submitted to the U.S. Treasury and IRS illustrates the confusion.
One September commentator asked for guidance on how to handle employees with multiple occupations for the same employer. Another asked why, since there is a specification for “eyebrow technician,” there is not a specification for “eyelash technician.”
Elkhay has the experience to navigate tax complexities, but he thinks next time it would be wise for lawmakers to spend a little more time on the prep work.
“It often happens that these politicians have no idea what’s going on,” he said. “Leave it to the government to give you a gift, and then you have to hire someone to tell you what they gave you.”
