IRS Issues Final Regulations on Qualified Tips Deduction
In early May, the IRS issued final regulations surrounding the qualified tips deduction enacted as part of the One Big Beautiful Bill Act (OBBBA). These rules clarify which occupations “customarily and regularly” receive tips and which tips qualify for the deduction. The regulations apply to tax years beginning after December 31, 2024 with an effective date of June 12, 2026.
Background
The OBBBA enacted a new federal income tax deduction for eligible taxpayers who receive qualified tips during tax years 2025 through 2028. A “qualified tip” is defined as any cash tip received in an occupation that regularly and customarily receives tips, but is subject to certain limitations. The deduction is limited to $25,000 per tax year and starts to phase out when the taxpayer’s modified adjusted gross income (AGI) exceeds $150,000 ($300,00 for joint filers). The allowable deduction amount phases out completely at an AGI of $400,000 ($550,000 for joint filers).
Requirements
The taxpayer’s employer must report the qualified tips on the employee’s W-2; alternatively, the employee must report the tips on Form 4137. Service recipients must report the qualified tips on a nonemployee payee’s Form 1099-NEC or Form 1099-K. As stated above, qualified tips are those cash tips received in occupations that customarily and regularly receive tips and are paid:
- In cash or an equivalent medium
- Through a mandatory or voluntary tip-sharing arrangement, and
- Voluntarily by customers and are not subject to negotiation
Qualified tips do not include:
- Any amounts received for illegal activity
- Tips received by an employee who has an ownership interest in or is employed by the tip payor, and
- Tips from specified service trades or businesses (for example, law, health, accounting, or performing arts)
Workers can only take the deduction for qualified tips listed on the forms above. Gig workers and other self-employed taxpayers can claim the deduction if their occupation is on the official List of Occupations that Receive Tips; in addition, the deduction for self-employed individuals is limited to the individual’s net income.
The IRS has established a list of those occupations that are eligible for the qualified tips deduction. Such occupations include the following categories:
- Beverage and Food Service,
- Entertainment and Events,
- Hospitality and Guest Services,
- Home Services,
- Personal Services,
- Personal Appearance and Wellness,
- Recreation and Instruction, and
- Transportation and Delivery.
Contact Us
If you have questions about the information outlined above or need assistance with another tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.