There’s now more guidance for the “no tax on tips” deduction.
getty
Beginning with 2025 tax filings, eligible workers will be able to deduct up to $25,000 in tips from their taxable income under the No Tax on Tips provision of the One Big, Beautiful Bill Act (OBBBA).
To help taxpayers sort out the details, the Treasury Department and the IRS are set to roll out additional guidance this week related to the deductions for tipped workers. While informal guidance, including a look at the infamous “traditionally tipped occupations list,” has been made available previously, the proposed regulations offer more formal guidance.
You can see the initial list here.
What Are Qualified Tips?
The proposed regulations identify the occupations that customarily and regularly receive tips and qualify for the deduction—they also clarify what counts as a “qualified tip.”
To be eligible for the deduction, tips must be earned in a recognized tipped occupation, paid voluntarily by customers, and given in cash or its equivalent. Cash equivalent includes tips paid by checks, credit cards, debit cards, gift cards, and tangible or intangible tokens readily exchangeable for cash or cash equivalent. That means that casino chips and digital tokens on streaming platforms would qualify as tips for purposes of the deduction (despite what had been suggested earlier on social media). However, for purposes of the deduction, cash tips would not include items like event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash —such as most digital assets.
Tip pools and similar arrangements qualify so long as they meet the other rules, including that they are reported and voluntary.
Yep. To qualify, the tips must be voluntary. That means that mandatory service charges, often added automatically to restaurant bills, do not qualify. Ditto for automatic gratuities or any “tip” or charge which the customer has no discretion to modify or disregard—those are not qualified tips. (Expect a lot of servers at country clubs and banquet halls to be unhappy with this requirement.)
Where Are Qualified Tips Reported?
For purposes of the deduction, qualified tips must be properly reported to the IRS on a Form W-2, 1099, or Form 4137.
Most taxpayers know about Forms W-2 and 1099, but Form 4137? It’s used to figure the Social Security and Medicare tax owed on tips you didn’t report to your employer, including any allocated tips shown on your Form W-2 that you must report as income.
You can see a draft Form W-2 here. But remember—the draft Form W-2 released by the IRS is for the 2026 tax year (for the tax return that you’ll file in early 2027).
There will be no changes to Form W-2 for the tax year 2025, even though some of the new provisions, including those new, temporary deductions, take effect in 2025. The IRS has previously said that the omissions are “intended to avoid disruptions during the tax filing season and to give the IRS, business and tax professionals enough time to implement the changes effectively.”
The Fine Print
The deduction is capped at $25,000 per return, not per taxpayer. That means that a married couple may not simply double the deduction, even if both taxpayers are tipped employees.
(My colleague, Peter Reilly, was one of the first to note the odd marriage penalties in OBBBA. You can read his take here.)
The deduction is available to taxpayers who itemize and to those who take the standard deduction, though it phases out for higher-income earners. Those phaseouts begin for single filers with income above $150,000 and married couples filing jointly with income above $300,000. The benefit is not available to married individuals filing separately, and both taxpayers must include their Social Security numbers on the return to claim it—that means that a jointly filed return must include two Social Security numbers.
It is important to note that while tipped workers will benefit from the new deduction, they will still be required to pay Social Security and Medicare payroll taxes on all tip income, just as they did before. State taxes may also apply. In other words, the “No Tax On Tips” moniker is more marketing than reality.
Acceptable—And Not So Acceptable—Job Descriptions
There are additional limits. Tips received in connection with certain specified service trades or businesses, sometimes referred to as SSTBs—such as the performing arts, athletics, healthcare, law, accounting, consulting, finance, brokerage, and other professional services—are excluded, even if the occupation itself appears on the tipped-occupations list. And, importantly, those rules don’t just apply to employers and owners, but also employees. Treasury has indicated that the regulations will provide examples to help workers and employers navigate these rules.
(A rule of thumb? Occupations that are excluded under section 199A are generally excludable here—that’s true even if the owner of the trade or business is not able to claim a section 199A deduction. Those occupations generally include any business whose success depends on the reputation or skill of its employees.)
The proposed guidance also addresses questions about relatively new occupations, including digital content creators. According to the list, streamers, podcasters, social media influencers, and other online entertainers who receive voluntary payments from followers may qualify, provided they otherwise meet the statutory requirements.
And despite some initial confusion, Treasury has now confirmed that qualified tips do not include those received in connection with illegal activity, defined as a felony or misdemeanor under applicable law, including performing services in human trafficking, exotic pet smuggling, counterfeiting or fencing stolen goods, drug trafficking, drug dealing, and unlicensed sales that violate the applicable law. Qualified tips also don’t include tips associated with prostitution or pornography. What, exactly, qualifies as pornography? While Justice Potter Stewart declared, “I know it when I see it” to describe the test for obscenity in Jacobellis v. Ohio, the IRS will likely have its own set of criteria—we’ll have to wait and see. Chances are, though, that some online accounts, including some on OnlyFans, will be disqualified.
An updated list of occupations—and codes to be used for reporting—is included in the proposed regulations.
2025 Is A Transition Year
Treasury officials acknowledged that 2025 will be treated as a transition year. Bumps are to be expected. For example, because the provision applies retroactively to January 1, reporting systems may not yet fully separate tip income from other earnings. The IRS intends to issue further guidance to help workers and employers in these situations and to provide transition relief for reporting entities. For now, the Treasury advises taxpayers to keep careful records of their tips and earnings. (To be fair, this is good advice all of the time.)
To support the rollout, the IRS has released a draft of Schedule 1-A, a new form that will allow taxpayers to claim this and three other deductions: the “no tax on overtime” provision, the deduction for car loan interest, and an additional deduction for seniors. Schedule 1-A will feed directly into Form 1040 when calculating tax liability. You can find more information about Schedule 1-A here.
What’s Next?
Before any proposed regulations, including these, are adopted as final regulations, they are subject to public comments. You can leave your comment (which will be public and cannot be edited or withdrawn on the Federal eRulemaking Portal.
Additionally, a public hearing on the regulations is scheduled for October 23, 2025, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. There’s also a phone option. You can find more information, including how to attend or testify, in the proposed regulations.
And there’s more information to come on OBBBA, so check back with Forbes. To keep it easy, I recommend that you subscribe to our free tax newsletter—that way, the information you need will land in your email inbox each Saturday morning with no additional work on your part.
Read the full article here