Don't Tax My Tips! How It Works

Takeaways

• The IRS has proposed new regulations clarifying which tipped occupations can deduct their tips from income under the One Big Beautiful Bill Act.
• Employees in 68 occupations may qualify for this limited-time federal income tax deduction.
• The deduction is capped at $25,000 annually and phases out for higher earners, with joint filers required to meet specific eligibility rules.

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the "OBBBA"), which added Section 224 to the Internal Revenue Code. This new section allows employees in occupations that regularly receive qualified tips to deduct those tips from their gross income when calculating federal income tax liability for taxable years beginning after December 31, 2024, and before January 1, 2029. The OBBBA directed the Secretary of the Treasury to publish a list of occupations that "customarily and regularly" receive tips to help taxpayers determine the applicability of the deduction to their occupations. In response to this directive, on September 22, 2025, the Department of the Treasury ("Treasury") and the Internal Revenue Service ("Service") issued proposed regulations (Prop. Treas, Reg. §1.224-1, 90 Fed. Reg. 45340 [Sept. 22, 2025]) defining the term "qualified tips" and identifying the occupations eligible for the deduction.

According to the proposed regulations, "qualified tips" are defined as cash tips received in occupations where tips were customarily and regularly received on or before December 31, 2024. Furthermore, the regulations specify that "cash tips" include amounts received from customers in cash or through cash-equivalent mediums, which include checks, credit cards, debit cards, gift cards, mobile payment applications, and tangible or intangible tokens that can be easily exchanged for cash, such as casino chips. Tips received through tip-sharing arrangements are also classified as cash tips. Any items paid with non-cash mediums are excluded from the definition of cash tips. Therefore, items such as event tickets, meals, services, or most digital assets do not qualify for this exemption. Qualified tips would also include tips reported under a Tip Rate Determination Agreement program or the Gaming Industry Tip Compliance Agreement program to deduct tips reported using the established tip rates under those agreements, as well as any additional amounts reported on Form 4137.

The regulations also outline what does not qualify as a "qualified tip." Tips will not be eligible for deduction if they are received for illegal services, prostitution, or pornographic activities. Also excluded are any tips received if the recipient has an ownership interest in, or is employed by, the payor of the tip. To qualify for the deduction, tips must be given voluntarily by the customer, without any consequences for nonpayment. They cannot be negotiated and must be determined solely at the discretion of the payor. For example, an 18% charge automatically added to a restaurant bill for a large party qualifies as a service charge and does not count as a qualified tip. Moreover, tips are excluded from the definition if received by a self-employed individual engaged in a specified service trade or business ("SSTB") as defined in Section 199A(d)(2) for the Qualified Business Income (QBI) deduction, or by an employee performing services for an employer operating an SSTB.

The proposed regulations include a comprehensive list of 68 qualifying occupations that are eligible for the deduction. These occupations are categorized into eight distinct, numbered groups, known as the Treasury Tipped Occupation Codes ("TTOC"). Examples of qualifying occupations under the TTOC include bartenders, gambling dealers, baggage porters and bellhops, home maintenance and repair workers, personal care and service workers, skincare specialists, golf caddies, and parking and valet attendants. Qualifying occupations also include occupations that customarily do not receive tips, such as chefs and cooks, dishwashers, electricians, plumbers, and appliance installers, among others.

The deduction is subject to several significant limitations under Section 224, and the proposed regulations offer additional guidance on these restrictions. Specifically, the deduction is available for those who itemize or do not itemize deductions and is capped at $25,000 per taxable year. The $25,000 cap applies regardless of filing status. The regulations also provide a phase-out of $100 for every $1,000 that a taxpayer's modified adjusted gross income exceeds $150,000 for single filers or $300,000 for joint filers. Married taxpayers can claim the deduction only if they file a joint return. To be eligible for the deduction, taxpayers must provide a valid Social Security number on their return; those using an Individual Taxpayer Identification Number are not eligible. The proposed regulations clarify that, for joint taxpayers, only the spouse who earned the qualified tips being claimed needs to provide a valid Social Security number; however, if both spouses earned qualified tips, both must include a valid Social Security number. For self-employed individuals, the deduction cannot exceed their net income from their trade or business after deducting all other allowable expenses. The tip deduction itself is not considered a business expense for this purpose. Tips must be reported to the Service on a designated form, including Form W-2, Form 1099-NEC, Form 1099-K, Form 1099-MISC, or Form 4137.

The introduction of Section 224 represents a significant change for individuals working in tipped occupations, as well as for employers who assist with tip reporting through the Service's compliance programs. The Treasury and Service estimate that more than 10 million tax returns will report tips under this new framework starting in 2026. Those who expect to benefit from the deduction should make sure they understand the eligibility rules, reporting requirements, and limitations. These proposed regulations offer additional guidance for taxpayers, as they will take effect for taxable years beginning after December 31, 2024. Taxpayers can rely on these regulations immediately for the 2025 tax year until final regulations are published.

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