IRS, Treasury release proposed rules on tip income deduction

The Department of the Treasury and the IRS have issued proposed regulations (REG-110032-25) implementing the “no tax on tips” provision of the One Big Beautiful Bill Act (H.R. 1, P.L. 119-21). The rules define “qualified tips,” clarify which occupations are covered and outline how taxpayers may claim the new deduction.  

Workers will be able to deduct up to $25,000 of qualified tip income per return for tax years 2025 through 2028, with the benefit phasing out above $150,000 of modified adjusted gross income ($300,000 for joint filers). Social Security and Medicare payroll taxes will still apply to tipped wages. 

To qualify, a worker must be employed in an occupation customarily and regularly receiving tips and receive payments that meet the definition of “qualified tips.” Acceptable forms include cash, checks, credit or debit cards, gift cards and mobile payment applications denominated in U.S. dollars. Tips must be paid voluntarily by the customer, either directly or through a tip pool. Automatic service charges, such as a restaurant’s mandatory gratuity, do not qualify, nor do tips linked to illegal activity. 

The proposed regulations provide a detailed “Treasury Tipped Occupation Code,” which assigns three-digit codes and descriptions to nearly 70 occupations, grouped into eight categories: food and beverage service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery. Covered workers range from bartenders to water taxi operators. Employees working in specified service trades or businesses (SSTBs), such as athletics or performing arts, remain excluded even if they receive tips. 

To support implementation, Treasury and the IRS have issued draft forms, including a new Schedule 1-A (Form 1040) and a revised Form W-2 to reflect deductible tip income beginning in 2026. Public comments on the proposed regulations are due by Oct. 23, 2025, through Regulations.gov, with full instructions for submission included in the guidance.