by Rena Pirsos, JD, Brightmine Legal Editor
The One Big Beautiful Bill Act (OBBBA), enacted in July, allows employees who work in jobs that were traditionally tipped occupations on or before December 31, 2024, to deduct up to $25,000 in qualified tips on their personal income tax returns. As required by the OBBBA, the IRS issued proposed regulations (which are proposed to apply starting with tax year 2025) that define the tipped jobs that qualify for this deduction. The regulations also affect employer wage reporting on Form W-2, Wage and Tax Statement.
Although currently in proposed form, employers may rely on the regulations for tax years beginning after December 31, 2024, and on or before the date they are published as final regulations in the Federal Register.
What are qualified tips?
Under the proposed regulations, qualified tips are cash or charged tips voluntarily given by service recipients, including:
- Tips suggested on a bill
- Tips allocated through a voluntary or mandatory tip pool
- Tips paid through debit or gift cards
- Tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (e.g., casino chips)
- Any other form of electronic settlement (e.g., a point-of-sale device) or mobile payment application that is denominated in cash
The proposed regulations clarify that qualified tips include those employees receive through the Tipped Employee Participation Agreement (as part of the Tip Rate Determination Agreement/TRDA program) or a Model Gaming Employee Tip Reporting Agreement (as part of the Gaming Industry Tip Compliance Agreement/GITCA).
Tips do not include service charges or tips suggested on a point-of-sale device with no option for no tips, because those tips are not freely given. Tips also must be received from customers (as opposed to money received by an employee for services performed for their employer).
The proposed regulations settle an ambiguity regarding the tip credit under the Fair Labor Standards Act (FLSA). For FLSA purposes, employers may not take the tip credit for back-of-restaurant workers who share tips through tip pools, like cooks or dishwashers. Under the proposed regulations, these workers would be allowed to deduct their tips. Employers will be required to report tips on these employees’ W-2 forms.
Occupation codes under the OBBBA proposed regulations
The proposed regulations also create a new categorization system, which provides an occupation code, description and illustrative examples that encompasses occupations that customarily and regularly received tips on or before December 31, 2024. Generally, the occupations are grouped 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
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About the author
Rena Pirsos, JD
Legal Editor, Brightmine
Rena Pirsos has more than 30 years of experience in legal publishing. At Brightmine, she covers topics related to payroll, including income and employment tax withholding, depositing and reporting; taxation of employee compensation and benefits; wage payments; child support and garnishment order compliance; and international payroll issues.
Rena holds a Juris Doctor degree from Hofstra University School of Law and a Bachelor of Arts degree in psychology and French literature from Fordham University’s College at Lincoln Center. Prior to joining Brightmine, she was managing editor for the American Payroll Association and developed and co-authored many of its core publications. In earlier years, she was managing editor of the UCC Law Journal and Banking Law Journal at Warren Gorham Lamont/Thomson Professional Publishing, and a legal editor for Thomson Reuters’ Payroll Guide, Prentice Hall’s guides to federal, state and local income tax, and CCH/Wolters Kluwer Federal Securities Law Reports.
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