Treasury rolls out guidance on no tax on tips

The Treasury Department released proposed regulations Friday on the "no tax on tips" provision of the One Big Beautiful Bill Act, outlining which types of jobs and tips would be eligible.

A draft list of jobs was released earlier this month, but without being formalized in proposed regulations, according to Treasury officials who briefed reporters and asked not to be identified.

The no tax on tips provision allows employees and self-employed individuals to deduct up to $25,000 of qualified tips they receive in a tax year per return. Eligible taxpayers can claim the deduction on their 2025 tax return that they file next year. The deduction for qualified tips is available to eligible taxpayers who itemize their deductions, as well as those who do not itemize and take the standard deduction. The deduction phases out for taxpayers with income above $150,000 for single filers, or $300,000 in the case of a married filing jointly return.

To be deductible as qualified tips, the tips must be earned in an occupation on the list of occupations that customarily and regularly receive tips. The tips must be paid in cash or an equivalent medium, such as a check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount of cash or another form of electronic settlement or mobile payment application, excluding digital assets that are denominated in cash. There's been some confusion about whether tips received on credit cards and debit cards count as cash tips, and the Treasury officials noted that they do qualify. As far as tangible tokens that are readily exchangeable for a fixed amount of cash, that would include casino chips. As for intangible tokens that are readily exchangeable for a fixed amount of cash, that includes certain tokens that are provided on streaming platforms.

As for the deductibility of qualified tips received from customers through a mandatory or voluntary tip-sharing arrangement, the tip will also qualify. However, the tips must be paid voluntarily by the customer and not be subject to negotiation, automatic service charges or automatic gratuities for which the customer has no discretion to modify or disregard, are not qualified tips. Under the statute, the tip must be voluntary. A mandatory service charge is not a qualified tip, and mandatory service charges are not eligible for deduction. The proposed regulations include detailed examples on how the rule works, including where there's both mandatory service charge and an additional voluntarily paid amount. 

In addition, the tips must not be received in the course of a so-called "specified service trade or business," even if the tips received were for services in an occupation that's on the list of occupations that customarily and regularly receive tips. SSTBs include services in the performing arts, health and athletics, as well as other professional occupations like law and finance. Employees need to look to the SSTB of their employer to determine their eligibility for the adoption. 

The proposed regulations provide some examples regarding this rule, and Treasury officials acknowledged that the rules can be confusing. As they go through the notice and comment period, they hope to provide more clarity.

Questions have arisen about whether OnlyFans creators could qualify for the tax break, but the Treasury officials noted that the tips must not be received in connection with illegal activity, prostitution or pornography. In order to be a qualified tip, the tip must be reported to the IRS on a Form W-2, 1099, or 4137, the form that employees use to report additional tips when they file their tax return. The deduction for qualified tips is not available unless the taxpayer includes their Social Security number on the tax return. 

The Treasury anticipates issuing additional guidance in the near term to advise on how individuals should determine their qualified tips for 2025, for example, if an individual receives a 1099 that aggregates their tip income with nontipped income. The Treasury also expects to issue additional guidance providing transition relief for employers and other entities with information reporting obligations. 

The Treasury Department has received questions about digital creators. In the occupations list, the proposed regulations provide explanatory definitions for each occupation, as well as some examples for digital content creators. They define those as individuals who produce and publish on digital platforms, original entertainment and personality driven content, such as live streams, short form videos and podcasts. Accounting Today asked how to resolve the contradiction with performing artists, who are among the specified service trades or businesses that are supposedly excluded from qualified tips. Treasury officials responded that the administration believes that digital content creators are an important new industry and sees the no tax on tips deduction as supporting that industry. They generally do not believe the SSTB restriction should impact the vast majority of digital content creators. They plan to issue further clarifying guidance on SSTBs after the notice and comment period.

List of occupations that receive tips

There's a three-digit code and descriptions for the occupations listed within the proposed regulations. which 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
• 800s – Transportation and delivery