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IRS Proposed Regulations on Tip Income Deduction

The IRS has released proposed regulations (REG‑110032‑25) clarifying how workers in tipped occupations may claim a new deduction under H.R. 1, the One Big Beautiful Bill Act. These rules are designed to help employees understand which tips qualify, which do not, and how to report them correctly. The guidance is part of the IRS’s broader effort to make sure taxpayers can take advantage of new deductions while staying compliant.
Key Highlights

  • To qualify, tips must be voluntarily given by customers and paid in acceptable forms (cash, check, card, gift card, or mobile payment denominated in cash). Most digital assets are excluded.
  • Service charges (like automatic gratuities added by restaurants) do not count as qualified tips.
  • Tips connected to unlawful activity are not eligible, and certain occupations, such as health services, performing arts, or athletics, are excluded under IRS rules.
  • The deduction is capped at $25,000 per return, not per person, for tax years 2025–2028.
  • Phase‑out thresholds begin at $150,000 AGI (single/HOH/MFS) or $300,000 AGI (joint filers).
  • Employees must still pay Medicare and Social Security payroll taxes on tip income, even if deductible.

Treasury Tipped Occupation Codes

The IRS has grouped eligible 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

What This Means for You

For workers in tipped jobs, this deduction could provide meaningful tax savings, but only if tips meet IRS definitions. The IRS has already released draft forms and promised transition guidance for 2025 to help employers and employees report tip income correctly.

Source: Journal of Accountancy, September 19, 2025, by Martha Waggoner.
This summary is for informational purposes only and does not constitute legal or tax advice. For authoritative guidance, consult IRS.gov or a licensed tax professional.