The Treasury Department and Internal Revenue Service have released proposed regulations that define which workers may qualify for the new “no tax on tips” deduction created under the One, Big, Beautiful Bill Act. The guidance identifies nearly 70 occupations that customarily receive tips and outlines criteria for what counts as deductible tip income.
The proposal follows the enactment of the OBBB Act on July 4, 2025, which introduced the tip deduction provision. The regulations are open for public comment until October 23, 2025, before being finalized.
For employers with tipped workers, the rules outline eligibility standards and establish new tracking responsibilities that will apply beginning with the 2025 tax year.
Which Workers Qualify for the Tip Deduction
The proposed regulations divide tipped occupations into eight categories, ranging from beverage and food service to transportation and delivery. Each occupation is assigned a three-digit Treasury Tipped Occupation Code that employers will need to track for reporting purposes.
The list includes familiar roles such as bartenders, servers, and taxi drivers, as well as less common positions like water taxi operators and certain personal service providers. Occupations are included only if they “customarily and regularly received tips on or before December 31, 2024,” according to the Treasury Department.
Some industries are specifically excluded from the deduction even when workers in those fields may receive gratuities. The proposal states that health services, performing arts, and athletics are not eligible to claim the tip deduction.
What Counts as Qualified Tips
The proposed rules set strict criteria for which tips can be deducted. To qualify, tips must be voluntary payments from customers, paid in cash or cash equivalents such as credit cards, checks, or mobile payment applications. Most digital assets, including cryptocurrency, are excluded under the current proposal.
Automatic service charges are treated separately. For example, a restaurant’s automatic 18% service charge for large parties, with no option for the customer to adjust, would not qualify as deductible tips even if distributed to staff.
The proposal also excludes payments linked to illegal activities, creating defined boundaries for what constitutes legitimate tip income.
New Reporting Requirements for Employers
Beginning with 2026 W-2 forms covering the 2025 tax year, employers will be required to report both an employee’s Treasury Tipped Occupation Code and the amount of qualified tip income. This introduces new administrative responsibilities for businesses with tipped staff.
According to the IRS, employers may use any reasonable accounting method to track tips during 2025 while the regulations are still being finalized. The agency noted that businesses should prepare systems to ensure compliance once the requirements take full effect.
The new reporting rules do not change existing minimum wage protections under the Fair Labor Standards Act. Employees who do not regularly earn at least $30 per month in tips may not be paid the lower tipped minimum wage, regardless of the proposed deduction.
Next Steps in the Rulemaking Process
The comment period for the proposed regulations remains open until October 23, 2025, giving employers, workers, and industry groups an opportunity to provide feedback before the rules are finalized. Treasury and the IRS may adjust the regulations based on the input received.
Employers with tipped staff are expected to begin reviewing payroll and reporting systems in anticipation of the new requirements. Coordination with payroll providers and tax professionals is likely to play a role in preparing for implementation once the rules take effect.
The proposed regulations represent a shift in how tip income is treated for tax purposes. While the framework is still subject to change, the release of draft rules signals the direction of future compliance standards for employers and workers in industries where tipping is customary.
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