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Proposed Regs Provide Guidance on New Qualified Tips Deduction
(Parker Tax Publishing September 2025)
The IRS issued proposed regulations that identify occupations that customarily and regularly received tips on or before December 31, 2024, and provide a definition of "qualified tips" for purposes of the deduction under new Code Sec. 224. The proposed regulations provide that only occupations included in the List of Occupations that Receive Tips are eligible for the deduction under Code Sec. 224(a). REG-110032-25.
Background
Section 70201(a) of the One Big Beautiful Bill Act of 2025 (Pub. L. 119-21) added new Code Sec. 224 to provide a deduction for "qualified tips" that are received during the tax year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. Section 70201(b) of the OBBBA added the deduction for qualified tips to the list of deductions used to determine taxable income in Code Sec. 63(b).
Specifically, Code Sec. 224(a) provides for a deduction in an amount equal to the qualified tips received by an individual in a tax year that are (1) included on a Form W-2, Wage and Tax Statement under Code Sec. 6051(a)(18); (2) included on a 1099 form under Code Sec. 6041(d)(3), Code Sec. 6041A(e)(3), or Code Sec. 6050W(f)(2); or (3) reported by the taxpayer on Form 4137, Social Security and Medicare Tax On Unreported Tip Income. Code Sec. 224(b)(1) limits the deduction to $25,000 in a tax year. Code Sec. 224(b)(2) further limits the amount of the deduction based on a taxpayer's modified adjusted gross income, which is a taxpayer's adjusted gross income for the tax year increased by any amount excluded from gross income under Code Secs. 911, 931, or 933. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
Code Sec. 224(c) provides that, in the case of qualified tips received by an individual during any tax year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips are taken into account under Code Sec. 224(a) only to the extent that the gross income for the taxpayer from such trade or business for such tax year (including such qualified tips) exceeds the sum of the deductions allocable to the trade or business in which such qualified tips are received by the individual for such tax year.
Code Sec. 224(d)(1) defines "qualified tips" as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Treasury Secretary. Code Sec. 224(d)(2) further requires that qualified tips not include any amount received by an individual unless the amount:
(1) is paid voluntarily without any consequence in the event of nonpayment;
(2) is not the subject of negotiation, and is determined by the payor;
(3) is not received in the course of a trade or business that is a specified service trade or business as defined in Code Sec. 199A(d)(2); and
(4) satisfies such other requirements as may be established by the Treasury Secretary in regulations or other guidance.
Code Sec. 224(d)(2) further provides that, for purposes of determining whether amounts received in the course of a trade or business is a specified trade or business as defined in Code Sec. 199A(d)(2), in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual is treated as receiving tips in the course of a trade or business which is a specified service trade or business if the trade or business of the employer is a specified service trade or business.
Code Sec. 224(d)(3) provides that for purposes of Code Sec. 224(d)(1), the term "cash tips" includes tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement. Code Sec. 224(e) provides that no deduction is allowed under Code Sec. 224 unless the taxpayer includes on the return of tax for the tax year such individual's social security number (SSN) as defined in Code Sec. 24(h)(7). Code Sec. 224(f) provides that if the taxpayer is a married individual, Code Sec. 224 applies only if the taxpayer and the taxpayer's spouse file a joint return for the tax year. That is, the deduction is not available for a taxpayer who is married and files separately.
Code Sec. 224(h) provides that no deduction is allowed under Code Sec. 224 for any tax year beginning after December 31, 2028.
Observation: On September 4, the IRS released a draft of 2025 Schedule 1-A (Form 1040), Additional Deductions, on which taxpayers will claim the deduction for qualified tips, as well as the deductions for overtime compensation, car loan interest, and the enhanced deduction for seniors that were enacted by the OBBBA.
Pub. L. 119-21, Sec. 70201(h) instructs the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024, for purposes of Code Sec. 224(d)(1) no later than 90 days after the date the OBBBA was enacted (July 4, 2025). On September 2, 2025, the Treasury Department issued a preliminary list of occupations that customarily and regularly received tips on or before December 31, 2024 ("Occupations That Customarily and Regularly Received Tips on or Before December 31, 2024"). The Treasury Department stated that the official proposed list of such occupations would be published in the Federal Register as part of forthcoming proposed regulations.
REG-110032-25
On September 19, the IRS issued proposed regulations in REG-110032-25 that identify occupations that customarily and regularly receive tips and define "qualified tips" eligible taxpayers may claim as a deduction. The regulations are proposed to apply for tax years beginning after December 31, 2024. Taxpayers may rely on the proposed regulations for tax years beginning after December 31, 2024, and on or before the date the regulations are published as final regulations in the Federal Register, provided that taxpayers follow the proposed regulations in their entirety and in a consistent manner.
Qualified Tips
Consistent with Code Sec. 224(d), the proposed regulations define "qualified tips" as amounts received as cash tips by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, subject to certain limitations. The proposed regulations define cash tips as tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are 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.
Observation: Under the proposed regulations, cash tips do not include items paid in any medium other than cash or charge, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets).
For purposes of the proposed regulations, tips are amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm's length transaction.
Payments Must Be Voluntary. Code Sec. 224(d)(2)(A) provides that "qualified tips" must be paid voluntarily without any consequence in the event of nonpayment, must not be the subject of negotiation, and must be determined by the payor. In Rev. Rul. 2012-18, the IRS applied similar factors in distinguishing tips from non-tip wages, specifically service charges, for FICA and income tax withholding purposes. Rev. Rul. 2012-18 provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion, (2) the customer must have the unrestricted right to determine the amount, (3) the payment should not be the subject of negotiation or dictated by employer policy, and (4) generally, the customer has the right to determine who receives the payment. Example A in Rev. Rul. 2012-18 concludes that an 18 percent charge automatically added to a bill for a large party is a service charge and not a tip because it was dictated by the employer and was not paid free from compulsion. Consistent with both existing IRS guidance on tips and evolving practices concerning service charges, the proposed regulations clarify that service charges, automatic gratuities, and other mandatory amounts automatically added to a customer's bill by the vendor or establishment, are not qualified tips for purposes of Code Sec. 224(d) unless the customer is expressly provided an option to disregard or modify it without consequence.
Special Rules Regarding SSTBs. Consistent with the flush language in Code Sec. 224(d)(2), the proposed regulations also provide that tips received by an employee performing services for the employee's employer in the course of a specified service trade or business (SSTB) operated by the employer are not qualified tips. The proposed regulations clarify that this rule applies without regard to whether an owner of the trade or business is able to claim a Code Sec.199A deduction. For example, this rule applies if the employer is a corporation, even though corporations are not eligible for the deduction under Code Sec.199A. The proposed regulations also clarify that this rule applies even if the employee receiving tips in the course of working for an SSTB employer is working in an occupation that customarily and regularly received tips on or before December 31, 2024, for purposes of Code Sec. 224(d)(1) and is listed in Prop. Reg. Sec. 1.224-1(f). The proposed regulations provide examples illustrating this rule.
Voluntary Tip Reporting Programs. Employees who enter into a Tipped Employee Participation Agreement as part of the Tip Rate Determination Agreement (TRDA) program or a Model Gaming Employee Tip Reporting Agreement as part of the Gaming Industry Tip Compliance Agreement (GITCA) program agree to report tips to their employer at or above the tip rate established by their employer for their occupational category. In exchange for the employees' voluntary agreement to report tips at this agreed upon rate, the IRS provides tip examination protection to the employees for the tax years in which their agreements were in effect. The proposed regulations clarify that "qualified tips" include tips reported pursuant to an agreement under the TRDA or GITCA program provided that the participating employee in the TRDA or GITCA program is otherwise eligible for the deduction under Code Sec. 224, and reports tips using the tip rates established under their agreement. Additionally, the proposed regulations clarify that an employee participating in the TRDA or GITCA program may report additional qualified tips to the IRS on the Form 4137.
Other Requirements. Code Sec. 224(d)(2) provides that the term "qualified tips" does not include amounts received by an individual unless such other requirements as may be established by the Treasury Secretary in regulations or other guidance are satisfied. The proposed regulations provide that amounts received for services the performance of which is a felony or misdemeanor under applicable law are not qualified tips. In addition, the proposed regulations provide that amounts received for prostitution services and pornographic activity are not qualified tips. Finally, to prevent reclassification of income as qualified tips, and to prevent abuse of the deduction, the proposed regulations also provide that a payment is not a qualified tip if the tip recipient has an ownership interest in or is employed by the payor of the tip.
Trade or Business Limitations
Code Sec. 224(c) imposes a limitation on a taxpayer who receives tips in the course of a trade or business (other than the trade or business of performing services as an employee). The proposed regulations restate the statutory limit, which is the difference between the gross income from the taxpayer's trade or business for the tax year minus the sum of deductions (other than the deduction for qualified tips) for that trade or business for the tax year. The proposed regulations clarify that the deduction allowed for qualified tips is not taken into account for this purpose because it is not a deduction associated with a trade or business.
Social Security Numbers and Married Individuals
The proposed regulations clarify that a taxpayer must include on the tax return for the tax year the SSN, within the meaning of Code Sec. 24(h)(7), of the individual who has received the tips. The proposed regulations also restate the statutory requirement that a taxpayer who is married, within the meaning of Code Sec. 7703, must file a joint return with the taxpayer's spouse to claim the deduction allowed by Code Sec. 224. The proposed regulations further clarify that married taxpayers are only required to include the SSN of the taxpayer who has received the qualified tips to claim the deduction, and that an SSN is required of both taxpayers only when both have qualified tips for which they are claiming a deduction.
The proposed regulations also clarify that the total amount of qualified tips that can be deducted on a return per calendar year is $25,000 regardless of filing status. After applying the $25,000 limitation, the proposed regulations provide that the amount is subject to the phase-out based on the taxpayers' modified adjusted gross income described in Code Sec. 224(b)(2).
List of Occupations That Receive Tips
The proposed regulations include a list of occupations that customarily and regularly received tips on or before December 31, 2024 (List of Occupations that Receive Tips). In accordance with Code Sec. 224(d)(1), the proposed regulations provide that only occupations included in the List of Occupations that Receive Tips are eligible for the deduction in Code Sec. 224(a).
The List of Occupations that Receive Tips included in the proposed regulations is organized according to a new categorization system created by the Treasury Department and the IRS specifically for this purpose. The specific occupations in the List of Occupations that Receive Tips, each assigned a three-digit code called a "Treasury Tipped Occupation Code" or "TTOC" are grouped together in the following more general occupational categories:
(1) 100s - Beverage and Food Service
(2) 200s - Entertainment and Events
(3) 300s - Hospitality and Guest Services
(4) 400s - Home Services
(5) 500s - Personal Services
(6) 600s - Personal Appearance and Wellness
(7) 700s - Recreation and Instruction
(8) 800s - Transportation and Delivery
The List of Occupations that Receive Tips also provides 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 SOC System Code(s).
For a discussion of the deduction for qualified tips, see Parker Tax ¶81,701.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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