The Treasury Department and IRS released proposed regulations (REG-110032-25) with guidance on the new federal deduction for tips, which was enacted in the "One Big Beautiful Bill Act" (P.L. 119-21, OBBBA) for tax years 2025 through 2028. The proposed regulations define "qualified tips" for purposes of the deduction and list the qualifying occupations.

Once finalized, the proposed regulations would apply to tax years beginning after December 31, 2024. Taxpayers may rely on the proposed regulations for tax years beginning after December 31, 2024, and before final regulations are published, as long as they follow them in their entirety and in a consistent manner.

Background

The OBBBA created new IRC Section 224, which allows a federal income tax deduction for qualified tips of up to $25,000 for both employees and independent contractors for tax years 2025 through 2028. The deduction is available to itemizers and non-itemizers and begins to phase out for adjusted gross income (AGI) over $150,000 ($300,000 joint) (see Tax Alert 2025-1476). The OBBBA also specified that tips do not qualify for the deduction if they are received by an individual in the course of a specified service trade or business (SSTB) (as defined in IRC Section 199A(d)(2)), including health care, performing arts and athletics.

Qualified tips are defined as any cash tip received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by Treasury. While the OBBBA did not include this list, Treasury was directed to publish a list of these occupations within 90 days of the OBBBA's enactment on July 4, 2025.

In September, Treasury released a preliminary list of the occupations that would qualify for the deduction (see Tax Alert 2025-1792).

Reporting requirements

Under the OBBBA, cash tips and the individual's occupation must be reported on certain Forms 1099 and on Form W-2 beginning with calendar year 2025. The IRS announced that it will not update 2025 individual information returns/statements (Forms W-2/1099) or withholding tables to reflect those changes and that the reporting will apply beginning with Forms W-2 due on February 1, 2027, for calendar year 2026 (see Tax Alert 2025-1671). The IRS subsequently released a draft Form W-2 and draft Form W-4 for 2026 indicating that the qualified tip amount will be reported in Box 12 and the TTOC in Box 14 (see Tax Alert 2025-1745).

Definition of cash tips

The proposed regulations define cash tips for purposes of the deduction. Under the proposed regulations, cash tips would be tips that are:

• Received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool
• Paid in a cash medium of exchange, including by cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash
• Not paid in any medium other than cash, such as event tickets, meals, services or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets)
• Amounts that customers pay for services beyond what is required, charged or reasonably expected in an arm's-length transaction

Tips would only meet the "voluntary" requirement if there is no consequence if the tip is not paid, the tips are not subject to negotiation and the payor determines the amount of the tip. Thus, service charges, automatic gratuities and any other "mandatory amounts" automatically added to a customer's bill by the vendor or establishment are not qualified tips, even if they are distributed to the employees. Tips would not be considered mandatory, however, if the customer is expressly given the option to disregard or modify the amounts added to the bill. The proposed regulations give several examples showing the situations when amounts would be considered deductible.

The proposed regulations would clarify the requirements around when amounts would be excluded from the definition of qualified tips because they are received by an individual in the course of an SSTB. Under the proposed regulations, the relevant business in making this determination is the employer's business. Therefore, if an employee receives tips while working for an employer that is an SSTB, those tips are not considered qualified tips — regardless whether the employer or owner could claim a deduction under IRC Section 199A and/or the employee's job is on the list of occupations that customarily and regularly received tips. The proposed regulations give several examples.

In addition, the proposed regulations specify that employees who enter into a Tipped Employee Participation Agreement as part of the Tip Reporting Determination Agreement (TRDA) program or a Model Gaming Employee Tip Reporting Agreement as part of the Gaming Industry Tip Compliance Agreement (GITCA) program may determine the amount of qualified tips using the applicable tip rate in their agreement instead of reporting actual tips received.

Qualified tips would not include amounts received: (1) for services that are a felony or misdemeanor under applicable law, (2) for prostitution services and pornographic activity, or (3) if the tip recipient has an ownership interest in or is employed by the tip payor, according to the proposed regulations.

The proposed regulations would clarify that married taxpayers would only be required to include the Social Security Number (SSN) of the taxpayer who has received the qualified tips to claim the deduction. The SSN is only required by both spouses when both have qualified tips for which they are claiming a deduction.

Occupations that qualify for the tip deduction

The proposed regulations include a list of the occupations that receive tips and therefore would qualify for the tip deduction. The list is the same as the preliminary list released earlier (see Tax Alert 2025-1792). The list contains the "TTOC Occupation Title" for each occupation code, a short description of the types of services performed by individuals working in an occupation included in this occupation code, illustrative examples of specific occupations that would be included under the occupation code and the Related Standard Occupational Classification (SOC) System Code(s).

Comments requested

Comments on the proposed regulations must be submitted by October 23, 2025.

In particular, the Treasury Department and IRS request comments on:

• How to apply "the existing rules under [Treas. Reg. Section] 1.199A-5(b) to the SSTB definition in [IRC S]section 224, and whether the definitions in [Treas. Reg. Section] 1.199A-5(b) should be refined to better align with the anti-abuse provision in [IRC S]ection 224 and the congressional directive for the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024"
• How to address the possibility of taxpayers misclassifying income as tips

Implications

Taxpayers paying or receiving tips may wish to study the regulations closely and submit comments by October 23, 2025.

Although Form W-2 reporting is not required for 2025, some employers are planning to report qualified tips to employees voluntarily. The proposed regulations provide useful guidance to those employers on how to determine the amount of qualified tips to report. According to the proposed regulations' preamble, the Council of Economic Advisors (CEA) estimates that the qualified tips deduction will increase average take-home pay for tipped workers by $1,300 per year.

Some of the specific examples illustrating voluntariness of payment were provided in response to requests for clarification from the food and beverage industry and may provide comfort to employers seeking clarity on specific technologies, such as point of sale (POS) devices. According to data included in the preamble, approximately 45% of all reported tips go to bartenders and wait staff.

Rideshare drivers and companies may be pleased that the preamble specifically acknowledges the possibility that rideshare drivers "may operate as independent contractors rather than employees."

The proposed regulations do not address qualified overtime. As with tips, some employers are planning to report qualified overtime voluntarily for 2025, but that will be challenging without further guidance from the IRS.