No tax on tips: Final rules confirm qualifying occupations and tip definition

Background: The "No tax on tips" provision in the OBBBA

The OBBBA, signed into law on July 4, 2025, added new section 224, providing an individual income tax deduction for "qualified tips" received by taxpayers performing services in an occupation that customarily and regularly received tips on or before Dec. 31, 2024.

The deduction is capped at $25,000 per return and phases out at a rate of $100 for each $1,000 by which modified adjusted gross income (MAGI) exceeds $150,000 for single filers ($300,000 for joint filers). The deduction is available to both itemizers and non-itemizers, is effective retroactively to Jan. 1, 2025, and applies through the 2028 taxable year. Social Security and Medicare taxes continue to apply to tip income; the deduction reduces federal income tax liability only.

For 2025, employers and payroll providers should continue using current procedures. No changes to 2025 information reporting or withholding tables were made. Beginning with amounts earned in 2026, employers are required to report the employee's Treasury Tipped Occupation Code (TTOC) in new Box 14b and qualified tip amounts in Box 12 with code "TP" on the Form W-2.

Finalizing the rules: What the final regulations confirm

The final regulations under Reg. section 1.224-1 adopt the proposed regulations under REG‑110032‑25 substantially as proposed, with targeted clarifications addressed below.

Occupations that qualify for the deduction

In finalizing the TTOC, Treasury confirmed an exhaustive, closed list and made targeted clarifications at the occupation level. The regulations make clear that only qualified tips received in occupations listed are eligible for deduction). For example, Treasury and IRS expressly confirm that doormen qualify as tipped workers, while declining to include roles where tipping is incidental or indirect.

The final rules also refined certain modern categories (such as digital content creators) while rejecting requests to add unlisted occupations through a facts and circumstances test. The illustrative examples provided within the list are not exhaustive and individuals may perform services within a TTOC-listed occupation that is not included within the examples provided within the final regulations.

Each occupation is assigned a three-digit TTOC. The occupations are grouped into eight categories:

More than 70 occupations are listed, including wait staff, bartenders, concierges, event officiants, massage therapists, golf caddies, taxi drivers, home heating and air conditioning mechanics and installers, digital content creators, water taxi operators and charter boat workers.

Definition of qualified tips

The final regulations confirm that "qualified tips" are cash tips received from customers, or through a voluntary or mandatory tip-sharing arrangement such as a tip pool. Cash tips include amounts paid in cash, check, credit card, debit card, gift card, tokens readily exchangeable for a fixed amount in cash (e.g., casino chips), or any other form of electronic settlement or mobile payment application denominated in U.S. dollars.

The final regulations expressly exclude digital assets, such as cryptocurrencies and stablecoins, from the definition of cash tips, regardless of whether the digital asset is pegged to the U.S. dollar. Tips paid in event tickets, meals, services, or other noncash mediums are similarly excluded.

Anti-abuse rule

The final regulations replace the proposed regulations' ownership-and-employment prohibition with a broader anti-abuse rule.

An amount is not a qualified tip if, based on all relevant facts and circumstances, it represents a recharacterization of wages or other compensation as tips. An irrebuttable presumption of recharacterization applies where either the employer is the payor of the tip, or the tip recipient owns at least 5% of the payor entity.

(The final regulations define ownership interest to mean, in the case of a corporation, ownership (by vote or value) of 5% or more of the stock in such corporation; in the case of a partnership, ownership of 5% of the profits interest or capital interest in such partnership, or in any other case, ownership of more than 5% of the beneficial interests in the entity. An ownership interest is tested as of the date the tip is received.)

Separately, the regulations make clear that employers should not restructure compensation arrangements to reclassify wages or guaranteed compensation as tips.

Amounts reported under a Tip Rate Determination Agreement (TRDA) or Gaming Industry Tip Compliance Agreement (GITCA) remain eligible as qualified tips, provided the participating employee is otherwise eligible and reports using the applicable agreement tip rates.

Requirement that tips be voluntary

A tip is a qualified tip only if paid voluntarily, without negotiation, and determined solely by the payor. The final regulations contain 12 illustrative examples of this principle (as well as an additional two examples of the definition of qualified tips detailing the distinctions between tips received by managers performing managerial duties and managers acting as employees listed in the TTOC list). Key points include:

• A non-negotiable automatic charge on the tip line of a bill is not a qualified tip.
• If a bill includes both an automatic charge and an "additional tip amount" line, the automatic charge is not a qualified tip, but a customer-added amount on the additional line is a qualified tip.
• A "recommended tip" that a customer may modify or disregard without consequence is not a service charge; the actual tipped amount is a qualified tip.
• Where a point-of-sale (POS) device offers a "no tip" option, any tipped amount is a qualified tip. Where the POS device does not offer a "no tip" option, only the amount in excess of the minimum required percentage qualifies.

Ongoing transition relief for amounts received in a specified service trade or business

Under section 224, qualified tips generally do not include amounts received by an individual performing services for an employer whose trade or business is a specified service trade or business (SSTB), as defined under section 199A(d)(2). SSTBs generally include businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services, among others.

Notice 2025-69 (issued Nov. 21, 2025) provided transition relief for employees working for SSTBs. This relief survives in the final regulations; however, the final regulations do not fully resolve how SSTB status is determined for all circumstances under section 224.

In Notice 2025-69, the IRS acknowledged that employees and employers need additional guidance and time to implement that guidance before the SSTB disqualification can be effectively administered. Accordingly, the IRS will not enforce the SSTB disqualification until January 1 of the first calendar year following the issuance of SSTB-specific final regulations.

During this transition period, tipped employees are treated as having received tips in the course of a non-SSTB trade or business, provided the employee's occupation would otherwise qualify as one of the TTOC listed occupations.

The IRS has indicated it anticipates issuing additional proposed regulations specifically addressing the SSTB rules, a separate rulemaking from REG-110032-25 / TD 10044.

Amounts received for illegal activity

The final regulations confirm that a tip received for a service which is a felony or misdemeanor under applicable law, as well as for prostitution services and pornographic activity, is not a qualified tip. However, tips received for an otherwise legal service while working for a business that violates the law in other respects (such as wait staff serving food but not alcohol in an establishment that sells alcohol without a license to do so) may still be qualified tips.

Other clarifications

• The $25,000 deduction cap applies per return, regardless of filing status.
• The deduction is available to both itemizers and non-itemizers.
• A taxpayer must include their Social Security number on the return to claim the deduction.

What employers should do now

With final regulations published, employers and payroll providers should take the following steps:

1. Confirm which employees work in TTOC-listed occupations and establish a process to identify and track qualified tips separately from non-qualifying amounts.
2. Review POS systems and tipping policies to ensure arrangements meet the voluntary requirements, particularly if automatic service charges or mandatory gratuities are currently in use, or if POS systems do not offer a zero-tip option.
3. Work with your human resources team and payroll provider to make sure proper amounts are being segregated and coded for appropriate reporting on Forms W-2 beginning in 2026. This includes reporting any applicable TTOC in new Box 14b and qualified tip amounts in Box 12 with code "TP."
4. Monitor for additional IRS guidance on outstanding questions (like application of the SSTB rules)
5. Consult with your tax advisor to evaluate application of the final regulations to your specific workforce and compensation arrangements.