The Department of the Treasury and the Internal Revenue Service has issued final regulations on the “No Tax on Tips” provision. The One, Big, Beautiful Bill final regulations provide the list of occupations that receive tips and define “qualified tips” that eligible taxpayers may claim as a deduction.
The final regulations list more than 70 separate occupations of tipped workers, from bartenders to water taxi operators. Additionally, the final regulations provide clarification on the definition of qualified tips, as well as guidance on other requirements under the section of the tax law defining qualified tips.
List of occupations that receive tips
The List of Occupations that Receive Tips is classified by the Treasury Tipped Occupation Code system, comprising a three-digit code and description for each of the occupations listed within the final regulations. As in the proposed regulations, the final regulations group the occupations into eight categories:
- 100s – Beverage and Food Service
- 200s – Entertainment and Events
- 300s – Hospitality and Guest Services
- 400s – Home Services
- 500s – Personal Services
- 600s – Personal Appearance and Wellness
- 700s – Recreation and Instruction
- 800s – Transportation and Delivery
The final regulations expand the list to include visual artists and floral designers in the personal services category and add gas pump attendants in the transportation and delivery category.
Definition of qualified tips
A worker may only claim the deduction for qualified tips. To be a qualified tip, the tip must be received by a worker in an occupation on the List of Occupations that Receive Tips. The final regulations follow the proposed regulations in further clarifying that qualified tips must satisfy certain requirements:
- Qualified tips must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash, or another form of electronic settlement or mobile payment application denominated in cash.
- Qualified tips must be received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.
- Qualified tips must be paid voluntarily by the customer and not be subject to negotiation. Qualified tips do not include service charges unless the customer has an option to disregard or modify the service charge. For instance, in the case of a restaurant that imposes an automatic 18% service charge for large parties and distributes that amount to waiters, bussers and kitchen staff, if the charge is added with no option for the customer to disregard or modify it, the amounts distributed to the workers from this service charge are not qualified tips.
Importantly, workers can take the deduction only for qualified tips that are included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported by the worker on Form 4137. Gig workers and other self-employed individuals can qualify for this deduction if their occupation is on the List of Occupations that Receive Tips and the other statutory and regulatory requirements are met.
