The Internal Revenue Service and the Treasury Department released
The Treasury released an
The Treasury and the IRS said Friday they received over 300 comments on the proposed regulations, and they convened a public hearing last October. The final regulations explain the comments and how the final regulations addressed them.
"Taxpayers are already benefiting from 'No Tax on Tips' since the IRS already is issuing refunds to eligible workers," said IRS CEO Frank Bisignano in a statement Friday. "Given the wide variety of workers who receive tips, these final regulations help implement an important tax benefit for American workers."
The final regulations list over 70 separate occupations of tipped workers, ranging from bartenders to water taxi operators. In addition, the final regulations offer clarification on the definition of qualified tips, as well as guidance on other requirements under the section of the tax law defining qualified tips.
The "List of Occupations that Receive Tips" is classified by the Treasury Tipped Occupation Code system, comprising a three-digit code and description for each of the occupations listed within the final regulations. As in the proposed regulations, the final regulations group the occupations into eight 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; and,
- 800s – Transportation and Delivery.
The final regulations expand the list to include visual artists and floral designers in the personal services category and add gas pump attendants in the transportation and delivery category.
Workers can only claim the deduction for qualified tips, the IRS and the Treasury noted. To be a qualified tip, the tip has to be received by a worker in one of the listed occupations. The final regulations also follow the proposed regulations in clarifying that qualified tips have to satisfy these requirements:
- They must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash, or another form of electronic settlement or mobile payment application denominated in cash.
- They must be received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.
- They must be paid voluntarily by the customer and not be subject to negotiation. Qualified tips do not include service charges unless the customer has an option to disregard or modify the service charge. For instance, in the case of a restaurant that imposes an automatic 18% service charge for large parties and distributes that amount to waiters, bussers and kitchen staff, if the charge is added with no option for the customer to disregard or modify it, it is not a qualified tip.
The IRS and the Treasury stressed that workers can take the deduction only for qualified tips that are included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported by the employee on Form 4137. Gig workers and other self-employed individuals can qualify for this deduction if their occupation is on the list, and the other statutory and regulatory requirements are met.
The new law also limits the deduction for self-employed individuals to the individual's net income.
The limitations on the deduction have sometimes been a disappointment to taxpayers this past tax season.
"When I look at the new tax form that came out the Schedule 1-A, right there on the form, it says, 'No tax on tips.' No, it's a tip deduction," said Tom O'Saben, director of tax content and government relations at the National Association of Tax Professionals. "And then we have to get into the factoids and break that down. We have to do education for people, and sometimes they're very much disappointed."
