New IRS & Treasury Guidance on Tipped Occupations Under OBBBA

On September 19, 2025, the U.S. Department of the Treasury and the IRS issued proposed regulations (REG-110032-25) under the One, Big, Beautiful Bill Act (OBBBA). These regulations define which occupations are eligible for the new tip deduction, clarify what counts as a “qualified tip,” establish limits and phase-outs, and begin to outline how reporting on W-2s, 1099s, and other tax forms will be handled.

Key Elements of the Proposed Regulations

1. Occupations Eligible for the Tip Deduction

Under IRC § 224 (added by OBBBA), only workers in occupations that “customarily and regularly received tips on or before December 31, 2024” can claim the deduction. To make this clear, the IRS has introduced a new classification system: Treasury Tipped Occupation Codes (TTOCs). Occupations are grouped into eight categories (each with a 3-digit code) that reflect industries where tipping has historically been common:

Code Range	Category	Examples
100s	Beverage & Food Service	servers, bartenders, counter service
200s	Entertainment & Events	performers, ushers, event staff
300s	Hospitality & Guest Services	hotel bellhops, housekeeping, concierges
400s	Home Services	cleaners, landscapers, repair workers
500s	Personal Services	personal assistants, pet caretakers
600s	Personal Appearance & Wellness	hair stylists, nail techs, massage therapists, estheticians
700s	Recreation & Instruction	instructors, tour guides, recreation staff
800s	Transportation & Delivery	taxi, rideshare, delivery, chauffeur

The full list covers nearly 70 detailed occupations. Even some roles without direct customer interaction may qualify if they participate in valid tip-sharing or pooling arrangements.

2. Definition of “Qualified Tips”

To be deductible, tips must meet all of the following criteria:

Voluntary – given freely by the customer (not a mandatory service charge).
Cash or equivalent – cash, check, card payments, gift cards, mobile app payments, or tokens with a fixed cash value. Most digital assets (like cryptocurrency) are excluded.
From customers or tip pools – tips may be received directly or through valid pooling/sharing arrangements.
Customary before 12/31/24 – the occupation must have regularly received tips before this date; occasional or holiday tips alone don’t qualify.

Exclusions:

Payments linked to illegal activity.
Occupations classified as certain Specified Service Trades or Businesses (SSTBs), even if otherwise on the list.

3. Deduction Limits & Phase-Outs

Deduction capped at $25,000 per tax return, regardless of filing status.
Begins to phase out at $150,000 MAGI (single or married filing separately) and $300,000 MAGI (married filing jointly).
Applies for tax years 2025 through 2028.

4. Reporting & Filing Requirements

The IRS is aligning reporting systems with the new deduction:

Form W-2 (Employees) – Employers must report qualified tips and the correct TTOC. A draft Form W-2 for 2026 includes boxes for qualified tips and a new provision for deductible overtime pay under H.R. 1.
Form 1099-NEC (Independent Contractors) – Nonemployees who receive tips must also have them reported, and additional statements may be needed to identify qualified tips.
Form 4137 – Workers must continue to use this form to report unreported tip income.
Schedule 1-A (Form 1040) – The IRS recently released a draft of Schedule 1-A, Additional Deductions for calculating four deductions under H.R. 1, including the tip deduction..

Employers and payers must also separate qualified tips from non-qualified amounts such as mandatory service charges, even if distributed to employees.

What These Changes Mean

This is a deduction, not an exemption – Tips remain taxable for income, Social Security, and Medicare. The deduction only lowers taxable income for federal income tax purposes.
Accurate reporting is essential – Unreported tips may not qualify. Employers and workers should keep clear, timely records.
Filing status matters – Phase-outs differ by filing status, and the $25,000 cap applies per return, not per person on a joint return.

Still Proposed Regulations

These rules are not yet final. The IRS is accepting public comments until October 23, 2025, via Regulations.gov. Final regulations may adjust the occupation list, the definition of qualified tips, or reporting requirements.

To ease implementation, Treasury will provide transition guidance for tax year 2025. This will include instructions for both employees and employers on handling situations where tip and non-tip income are not separately reported.

Conclusion

The OBBBA tip deduction is a significant change for both tipped workers and the businesses that employ them. It creates:

A defined list of eligible occupations (via TTOCs).
A clear definition of “qualified tips.”
Deduction limits and income thresholds.
New reporting requirements on W-2s, 1099s, and individual returns.

While still in the proposal stage, the IRS has already begun releasing draft forms. Now is the time for businesses and individuals to adjust payroll systems, recordkeeping, and reporting practices to prepare for these changes.