Section 70201(a) of the One, Big, Beautiful Bill Act (“OBBBA”) added section 224 to the Internal Revenue Code, providing an income tax deduction for “qualified tips” that are received during the taxable year by individuals employed in an occupation that customarily and regularly received tips on or before December 31, 2024. Section 224(a) specifically provides for a deduction in an amount equal to the qualified tips received by an individual in a taxable year that are included on statements (i.e., Form 1099) furnished to the individual. Section 224(b)(1) limits this deduction, however, to an amount not to exceed $25,000 in a taxable year, with further limitations under Section 224(b)(2) based on a taxpayer’s modified adjusted gross income. This past Friday, the Department of the Treasury and the Internal Revenue Service issued proposed regulations (Link: Federal Register :: Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips) regarding this “No Tax on Tips” policy, giving the public until October 23, 2025 to provide comments.
The newly proposed regulations: (1) identify (via use of three-digit codes and descriptions) the eight categories of occupations that receive qualified tips; and (2) define the specific type of tips that are eligible. In order to claim the deduction, a worker must both be in an occupation on the list and receive qualified tips. Generally, qualified tips must be paid in cash or an equivalent medium or through another form of electronic settlement or mobile payment application (excluding most digital assets) denominated in cash. The tips must be received directly from customers or through a mandatory tip-sharing arrangement (i.e., tip pool). The tips must also be paid voluntarily in an amount determined by the payor, they cannot be added to a bill with no option for the customer to disregard nor can they be subject to negotiation. Qualified tips do not include tips received in the course of a trade or business that is a specified service trade or business as defined in section 199A(d)(2) of the Code (e.g., health, law, accounting, financial services) nor any tips received in connection with illegal activity.
IR-2025-92, Sept. 19, 2025 (Link: Treasury, IRS issue guidance listing occupations where workers customarily and regularly receive tips under the One, Big, Beautiful Bill | Internal Revenue Service_
