IRS issues first proposed regs on tip deduction

Tax Hot Topics

The IRS issued proposed regulations on Sept. 19, addressing key elements of the new tax benefit for tip income included in the One Big Beautiful Bill Act (OBBBA), which allows individuals an above-the-line deduction on their Forms 1040 for qualified tips received in the 2025 through 2028 calendar years. Guidance for employers, who will need to provide documentation to employees claiming the deduction, has not yet been released.

Under the new law, the term “qualified tips” generally means cash tips received by an individual in an occupation that customarily and regularly receives tips on or before Dec. 31, 2024. The proposed regulations would define cash tips as tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are paid in a cash medium of exchange, including by cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips) and any other form of electronic settlement or mobile payment application that is denominated in cash. Cash tips would not include items paid in any other form, such as event tickets, meals, services or other assets that are not exchangeable for a fixed amount of cash (such as most digital assets).

Qualified tips must be paid voluntarily without any consequence in the event of nonpayment, must be the subject of negotiation and must be determined by the payor. The proposed regulations would clarify that service charges, automatic gratuities and other mandatory amounts automatically added to a customer’s bill by the vendor or establishment are not qualified tips unless the customer is expressly provided an option to disregard or modify them without consequence.

As required by the OBBBA, the IRS last month published a list of 68 specific occupations that customarily and regularly receive tips on or before Dec. 31, 2024, and the proposed regulations include this list. Each is assigned a three-digit code called a Treasury Tipped Occupation Code (TTOC), which is grouped together in the following general occupation categories:

• 100s - Beverage and Food Service
• 200s - Entertainment and Events
• 300s - Hospitality and Guest Services
• 400s - Home Services
• 500s - Personal Services
• 600s - Personal Appearance and Wellness
• 700s - Recreation and Instruction
• 800s - Transportation and Delivery

The proposed regulations also provide guidance, including clarifying examples, addressing other conditions and limitations that apply to the new tax deduction, including:

• Qualified tips generally do not include those received in the course of a specified service trade or business (SSTB) as defined in Section 199A(d)(2), which generally includes the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners, or that includes the performance of services that consist of investing and investment management, trading or dealing in securities, partnership interests, or commodities. This rule would apply even if the employee employed by the SSTB works in an occupation that customarily and regularly receives tips.
• A taxpayer must include on the tax return for the taxable year of deduction the Social Security Number, as defined in Section 24(h)(7), of the individual who received the tip.
• The maximum amount of qualified tips that can be deducted per calendar year is $25,000, regardless of filing status.
• The amount allowable as a deduction is reduced (but not below zero) by $100 for each $1,000 by which a taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 for  a joint return).

The OBBBA also requires employers to report the amount of qualified tips to workers on a Form W-2 or 1099-NEC, as applicable. The IRS has announced there will be no changes to individual information returns or federal withholding tables for tax year 2025 but has indicated that additional guidance will be provided for employers, including on how information is to be provided for this year. In addition, the IRS released a draft version of the 2026 Form W-2 that introduces new reporting elements aligned with the OBBBA’s provisions.

Priority guidance plan coming

Businesses should get a better idea of when they will see that additional guidance soon, as Deputy Assistant Secretary for Tax Policy Kevin Salinger told an audience last week that Treasury will release its priority guidance plan (PGP) in late September or early October. 

“What you’ll see on the PGP is One Big Beautiful Bill implementation, deregulatory priorities,” he said, adding that there will be two more notices on the corporate alternative minimum tax this year, focused on deregulatory efforts. This follows two already released in 2025.   

Contacts: