Qualified Tips Deduction Final Regulations Under the OBBB Act

 

The IRS has issued final regulations that identify occupations that customarily and regularly receive tips and qualified tips that eligible recipients may claim as a deduction, enacted as part of the One Big Beautiful Bill Act (OBBB Act). This guidance applies to tax years beginning after December 31, 2024, and is effective on June 12, 2026.

 

Background

Under the OBBB Act, eligible individuals can claim an income tax deduction for qualified tips received in tax years 2025 through 2028. A "qualified tip" is any cash tip received in an occupation that customarily and regularly receives tips on or before December 31, 2024, and is subject to certain limitations.

The deduction is limited to $25,000 per tax year and begins to phase out when modified adjusted gross income (AGI) exceeds $150,000 ($300,000 for joint filers). The allowable qualified tip deduction amount phases out completely when the taxpayer’s modified AGI reaches $400,000 ($550,000 for joint filers). Married taxpayers must file jointly to claim the deduction. Amounts that do not meet certain requirements are excluded from the qualified tip treatment.

Reporting Requirements

An employer must report qualified tips on the employee‘s Form W-2, or the employee must report the tips on Form 4137, Social Security and Medicare Tax On Unreported Tip Income. A service recipient must report qualified tips on the nonemployee payee‘s Form 1099-NEC or Form 1099-K.

Qualified Tips. A "qualified tip" is any cash tip received in an occupation that customarily and regularly receives tips on or before December 31, 2024, and is subject to certain limitations. Qualified tips are:

  • paid in cash or an equivalent medium,
  • in the case of an employee, paid through a mandatory or voluntary tip-sharing arrangement, and
  • paid voluntarily by customers and not subject to negotiation.

Exclusions. Qualified tips do not include:

  • any amount received for illegal activity, prostitution services, or pornographic activity,
  • tips received by an employee or other service provider who has an ownership interest in or is employed by the tip payor, and
  • tips from specified service trade or business (SSTB) (ex., law, health, accounting, performing arts).

Importantly, workers can take the deduction only for qualified tips that are included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported by the worker on Form 4137. Gig workers and other self-employed individuals can qualify for this deduction if their occupation is on the List of Occupations that Receive Tips and the other statutory and regulatory requirements are met. Additionally, the new law limits the deduction for self-employed individuals to the individual's net income.

List of Occupations. The IRS established a list of occupations that customarily and regularly receive qualified tips and that are eligible for the qualified tips deduction. The occupations include the following categories:

  • Beverage and Food Service,
  • Entertainment and Events,
  • Hospitality and Guest Services,
  • Home Services,
  • Personal Services,
  • Personal Appearance and Wellness,
  • Recreation and Instruction, and
  • Transportation and Delivery.

The final regulations expand the list to include visual artists and floral designers in the personal services category and add gas pump attendants in the transportation and delivery category.

Contact Us

Please call our office if you would like to discuss how you might benefit from the qualified tips deduction. We are here to assist.