IRS Lists Jobs that Qualify for OBBBA’s “No Tax on Tips”
The IRS on September 22 published proposed regulations identifying the occupations that customarily and regularly received tips before December 31, 2024. The proposed regulations also define “qualified tips” eligible taxpayers may claim as a deduction.
OBBBA “No Tax on Tips” (2025–2028)
The new “no tax on tips” deduction was enacted as part of the One Big Beautiful Bill Act (OBBBA). Up to $25,000 in “qualified tips” per year is allowed as a deduction on an individual’s Form 1040 for calendar years 2025 through 2028, regardless of whether the individual itemizes deductions.
Occupations that customarily and regularly received tips before Dec. 31, 2024, are eligible for the new deduction. The proposed regulations list 68 occupations, divided into eight industry categories:
- Beverage and food service
- Entertainment and events
- Hospitality and guest services
- Home services
- Personal services
- Personal appearance and wellness
- Recreation and instruction
- Transportation and delivery
Some occupations identified as “specified service trades or businesses” (SSTB), such as health care, performing arts, and athletics, are excluded from the deduction. Thus, if an employee of an SSTB receives a tip, the employee is not eligible to claim the deduction. Tips are also excluded if the tip recipient has an ownership interest in or is employed by the tip payor.
The deduction begins to phase out at $150,000 of adjusted gross income (AGI) ($300,000 for joint filers); $100 reduction per $1,000 over the threshold.
New Form W-2, Form 1099-NEC, and/or Form 4137 reporting requirements for “qualified tips” start in 2026.
What’s New in the Proposed Regulations
Form of Qualified Tips: Cash, checks, gift cards, and even casino chips could be qualified tips that are eligible for the deduction, as well as any form of electronic or mobile payment that is denominated in cash. In-kind tips that are not denominated in cash (such as event tickets, meals, services, and property) are not eligible for the deduction.
Eligibility: Qualified tips must be received either directly from customers or through a mandatory or voluntary tip-sharing arrangement. Thus, individuals who do not directly interact with customers -- such as dishwashers or kitchen staff at a restaurant -- are eligible for the deduction.
Must Be Voluntary: Mandatory service charges or automatic gratuities added to a customer’s bill are not eligible for the deduction, even if those amounts are distributed to employees. The proposed regulations clarify that if a customer is forced to give a tip (for example, by not including a “no tip” or “custom tip” option on a prefilled computer screen suggesting tips at various rates), the tip is not eligible for the deduction.
Illegal Activities: Tips provided for any activity that is a felony or misdemeanor under any applicable law (not just federal law) would not be eligible for the deduction. For example, while online content creators are generally eligible for the new tip deduction, under the proposed regulations, if such content is illegal (e.g., related to prostitution or pornography), the tip would not qualify for the deduction.
BDO Insight
This is a temporary personal income tax deduction, not an exclusion. Tips remain subject to federal income and employment tax withholding and benefit plan compensation rules.
The IRS released a draft Schedule 1-A, Additional Deductions, for the 2025 Form 1040, which is the schedule individuals would use to calculate the new deductions allowed under the OBBBBA, including the new deduction for qualified tips.
The IRS also released a draft 2026 Form W-2, Wage and Tax Statement, so employers can have an idea about how they will need to report cash tips next year. But on August 7, 2025, the IRS announced that it will not revise the 2025 Form W-2, nor will it revise the 2025 tax withholding tables. Employers must make a reasonable, good faith effort to estimate the cash tips employees earned from January 1, 2025, through December 31, 2025.
The proposed regulations do not provide much direction for employers on how they should document and communicate tip eligibility to their employees who may be eligible for the new tip deduction on their personal 2025 Form 1040. Some employers are considering providing a separate statement to employees estimating the amount of their 2025 cash tips, retroactive to January 1, 2025, because employers didn’t know they had to separately determine qualified tips until July 4, 2025 (the OBBBA’s enactment date).
The IRS’s proposed regulations provide much-needed clarifications regarding who is eligible for the new personal income tax deduction for calendar years 2025 through 2028, but they are not directly aligned with the U.S. Department of Labor’s (DOL)’s Fair Labor Standards Act (FLSA) rules on which jobs customarily and regularly receive tips. For example, the DOL’s FLSA rules focus primarily on tips received through direct interactions with customers, while the IRS’s proposed regulations are broader (for example, they include kitchen staff who share in a tip pool but do not have any direct interaction with customers).
Taxpayers may rely on the proposed regulations for tax years beginning after December 31, 2024, and before final regulations are published, so long as they follow them in their entirety and in a consistent manner.
The proposed regulations do not address the “no tax on overtime” provision in the OBBBA, which created a new category of “qualified overtime.”
Action Steps for Employers
- Continue reporting and withholding on tips as usual for income and employment taxes until the IRS releases further guidance. Employers can approximate the amount of “cash tips” for 2025 by using any reasonable method specified by the IRS.
- Employers should consider using the 2025 Form W-2, Box 14 (Other) to report cash tips for 2025. The 2025 Form 1099-NEC does not have an “Other” box, so entities with independent contractors may need to issue them a separate statement approximating the amount of their cash tips.
- Prepare payroll systems for new reporting fields in 2026.
- Communicate the rules to employees (for example, identify eligible and ineligible tips, and explain that mandatory service charges are not eligible).
Please visit BDO’s Global Employer Services page for more information on how BDO can help.
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