The Treasury Department and the IRS have finalized regulations (TD 10044) under IRC Section 224 defining "qualified tips" and identifying occupations that customarily and regularly received tips on or before December 31, 2024, for purposes of the temporary federal income tax deduction for tips, which was enacted by the "One Big Beautiful Bill Act." The final regulations generally adopt the proposed regulations issued in September 2025, with modifications and clarifications reflecting public comments. The IRS and Treasury received 322 written comments in response to the proposed regulations.

The final regulations apply to 2025 through 2028, but taxpayers may rely on the proposed regulations (in their entirety) for 2025 (in addition to 2025 transition relief).

Background

The OBBBA allows, for tax years 2025 through 2028, a federal income tax deduction for qualified tips of up to $25,000 for both employees and independent contractors and for qualified overtime compensation of up to $12,500 (see Tax Alert 2025-1476).

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. The OBBBA also specified that tips do not qualify for the deduction if the individual receiving them works for a specified service trade or business (SSTB) (as defined in IRC Section 199A(d)(2)), including health care, performing arts and athletics.

In September 2025, the IRS and Treasury released proposed regulations defining "qualified tips" for purposes of the deduction and listing the qualifying occupations (see Tax Alert 2025-1907). The IRS subsequently released Notice 2025-62, stating that employers were not subject to penalties for 2025 for failure to file correct information returns or furnish correct payee statements reporting qualified tips and qualified overtime compensation (Tax Alert 2025-2250). In November 2025, the IRS issued Notice 2025-69 on how employees and other individuals eligible to claim the deductions could calculate these amounts for 2025 absent a separate accounting from their employer (see Tax Alert 2025-2395).

No regulations have been proposed on qualified overtime compensation.

Final regulations

The final regulations retained most of the proposed regulations with some modifications.

For the most part, the list of occupations in the final regulations reflects the list in the proposed regulations. The final list does, however, include three new occupations that are eligible for the deduction: visual artists, floral designers and gas pump attendants.

The final list also clarifies some of the occupation descriptions and illustrative examples, such as adding (1) banquet staff under wait staff, (2) doorman under baggage porters and bellhops, and (3) app/platform-based drivers or delivery persons.

The final regulations also clarify that:

• Only tips received in occupations on the published list can qualify for the deduction
• The illustrative examples within each Treasury Tipped Occupation Code category are not exhaustive

The final regulations adopt the proposed definition of "qualified tips" without substantive modification. Tips must still be voluntary, non-negotiated, paid in cash or cash-equivalent media, and not received in connection with a specified service trade or business (as determined by the employer's trade or business in the case of employees). The final regulations do not, however, address the specified service trade or business exclusion, effectively continuing the transition relief provided in Notice 2025-69, so the exclusion will not apply unless rules are provided in future final regulations.

Anti-abuse measures

In the proposed regulations, the IRS asked how to address the possibility of taxpayers recharacterizing other income as tips. The final regulations address this issue by adopting a facts-and-circumstances test under which a payment is not a qualified tip if it represents wages, payments for services or other income that has been recharacterized in order to claim the deduction.

The regulations identify indicators of recharacterization, such as discrepancies between invoiced service charges and reported tips, or significant shifts in historical tipping practices. They also establish an irrebuttable presumption of recharacterization when (1) the employer is the payor of a cash tip or (2) the tip recipient has a direct ownership interest in the payor. Ownership interest is defined using a 5% threshold, with detailed rules for determining ownership.

Implications

Affected taxpayers now have what are expected to be the final substantive rules for qualified tips, including the final list of tipped occupations. These rules will be particularly important for 2026 through 2028, and employers and other taxpayers subject to information reporting requirements will need to prepare to comply.

Detailed information reporting rules are beyond the scope of the regulations and will be addressed in IRS forms and instructions as well as other IRS resources.