This summary is based on proposed regulations and the rules may change in the future. Please see disclaimers at the bottom of the page.

The new deduction for qualified tips, enacted by the One Big Beautiful Bill Act (OBBBA) and codified in IRC §224, is effective for tax years 2025 through 2028. Below is a comprehensive explanation of how this deduction will work for 2025, including eligibility, calculation, limitations, and compliance requirements, based on the statute, proposed regulations, and related guidance.

1. Who Is Eligible?
Employees and Self-Employed Individuals: The deduction is available to both employees and self-employed individuals who receive tips in the course of their occupation.
Occupational Requirement: Only individuals working in occupations that the IRS has listed as “customarily and regularly” receiving tips on or before December 31, 2024, are eligible. The IRS has published a detailed list of such occupations in the proposed regulations, organized by Treasury Tipped Occupation Code (TTOC). Examples include wait staff, bartenders, taxi and rideshare drivers, hairdressers, hotel bellhops, and casino dealers, among others.
Specified Service Trade or Business (SSTB) Exclusion: No deduction is allowed for tips received in the course of a specified service trade or business (SSTB) as defined in IRC §199A(d)(2). This includes fields such as health, law, accounting, performing arts, consulting, athletics, financial services, and any business where the principal asset is the reputation or skill of one or more employees or owners. For employees, if their employer is an SSTB, their tips are not eligible, regardless of the employee’s specific role.

2. What Counts as a Qualified Tip?
Definition: “Qualified tips” are cash tips received by an individual in a listed occupation, provided the tips are:
Paid voluntarily by the customer, without compulsion or negotiation, and determined by the payor.
Not service charges, automatic gratuities, or other mandatory amounts unless the customer can expressly disregard or modify the amount without consequence.
Received in cash or cash equivalents (including check, credit card, debit card, gift card, tokens readily exchangeable for cash, or electronic/mobile payments denominated in cash). Non-cash items (e.g., event tickets, meals, most digital assets) do not qualify.
For employees, tips received through mandatory or voluntary tip-sharing arrangements (such as tip pools) also qualify.
Reporting Requirement: The tips must be included on statements furnished to the individual (e.g., Form W-2, Form 1099-NEC, Form 1099-K, Form 1099-MISC, or Form 4137).
Exclusions: Tips received for illegal activities, prostitution, or pornographic activity are not qualified tips. Tips are also not qualified if the recipient has an ownership interest in or is employed by the payor of the tip.

3. How Is the Deduction Calculated?
Annual Limit: The maximum deduction is $25,000 per return, regardless of filing status.
Phase-Out for High Incomes: The deduction is reduced by $100 for every $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers). MAGI is AGI plus any amounts excluded under IRC §§911, 931, or 933.
Example: If a single filer has $200,000 in MAGI, the deduction is reduced by $5,000 ($100 × 50).
Self-Employed Limitation: For self-employed individuals, the deduction cannot exceed the net income (gross income minus all other deductions except the tip deduction itself) from the trade or business in which the tips were earned.
Married Filing Jointly: If both spouses have qualified tips, the combined deduction is still capped at $25,000 per return.

4. Other Requirements and Compliance
Social Security Number: The taxpayer must include their Social Security Number (SSN) on the return to claim the deduction. Both spouses’ SSNs are required if both are claiming the deduction.
Married Filing Status: Married individuals must file jointly to claim the deduction.
Itemizers and Non-Itemizers: The deduction is available whether or not the taxpayer itemizes deductions; it is an “above-the-line” deduction.
Reporting by Employers and Payers: Employers and other payers must file information returns with the IRS and furnish statements to taxpayers showing the amount of qualified tips and the occupation of the tip recipient. The IRS will provide transition relief for 2025 as reporting systems are updated.

5. Anti-Abuse and Special Rules
Anti-Abuse Rule: The IRS may issue further regulations to prevent reclassification of income as tips. The proposed regulations disallow the deduction for tips received from a payor in which the recipient has an ownership interest or is employed, to prevent self-tipping or circular arrangements.
Transition Relief: For 2025, the IRS will provide transition relief for both taxpayers and employers as new reporting and compliance systems are implemented.

6. Termination
Sunset: The deduction is only available for tax years beginning after December 31, 2024, and before January 1, 2029 (i.e., 2025–2028 tax years).

7. Summary Table of Key Occupations (Selected Examples)
The IRS’s proposed regulations include a detailed list of eligible occupations, such as:

Bartenders
Wait staff
Food servers (non-restaurant)
Dining room and cafeteria attendants
Chefs and cooks
Taxi and rideshare drivers
Hairdressers, barbers, cosmetologists
Hotel bellhops and concierges
Casino dealers
Goods delivery people
Manicurists and pedicurists
Massage therapists
Tour guides
Parking and valet attendants
(For the full list, see the IRS’s published Table 1 in the proposed regulations)

8. Practical Example
Suppose a single restaurant server receives $12,500 in qualified tips in 2025, all reported on Form W-2. Their MAGI is $140,000. They may deduct the full $12,500, as it is below the $12,500 single cap and their income is below the phase-out threshold. If their MAGI were $170,000, the deduction would be reduced by $2,000 ($100 × 20), so only $10,500 would be deductible.

9. Payroll Tax Treatment
The deduction does not affect the requirement to pay Social Security and Medicare (FICA) taxes on tip income. The deduction is for income tax purposes only.


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