No Tax on Tips 2025 – What Counts

The “No Tax on Tips” Provision Under OBBB: What Tax Pros Need to Know for 2025

The landscape of tip taxation in the United States has changed dramatically with the passage of the One Big Beautiful Bill Act (OBBB), now Public Law 119-21, effective July 4, 2025. Among its most headline-grabbing reforms is the “no tax on tips” provision, which has generated both excitement and confusion among tax professionals, employers, and workers in tipped occupations. On September 19, 2025, the Treasury Department and the IRS issued proposed regulations (IR-2025-92) clarifying which occupations qualify, what constitutes a “qualified tip,” and how the deduction works in practice.

This blog provides a comprehensive, practitioner-focused analysis of the new rules, including the latest guidance, definitions, and compliance steps. It also highlights key differences between pre-OBBB and post-OBBB law, and offers practical recommendations for tax professionals advising clients in the hospitality, service, and related industries.

Short Answer

• The OBBB “no tax on tips” provision exempts qualified tips from federal income tax for workers in nearly 70 specified occupations, as detailed in proposed Treasury regulations.
• To claim the deduction, a worker must be in a listed occupation and receive “qualified tips” as defined by the new rules.
• Service charges and certain other payments do not qualify; only voluntary, customer-paid tips in cash or equivalent forms are eligible.

Analysis

1. Background: OBBB and the “No Tax on Tips” Revolution

The OBBB represents the most sweeping overhaul of the Internal Revenue Code since 1986. One of its signature features is the elimination of federal income tax on tips for workers in occupations where tipping is customary and regular. This provision aims to simplify compliance, reduce audit risk, and provide meaningful tax relief to millions of service workers.

2. Who Qualifies? The Occupation List and Codes

The Treasury’s proposed regulations, released on September 19, 2025, provide a detailed list of nearly 70 occupations considered to “customarily and regularly receive tips.” Each occupation is assigned a three-digit Treasury Tipped Occupation Code, grouped into eight broad categories:

Key Point: A worker must be employed in one of these listed occupations to be eligible for the tip deduction. The full list, with codes and descriptions, is included in the proposed regulations and is expected to be finalized after the public comment period ends on October 23, 2025.

3. What Are “Qualified Tips”?

The definition of “qualified tips” is central to the new deduction. The proposed regulations set out several requirements:

Form of Payment

Qualified tips must be paid in cash or an equivalent medium. This includes:

• Cash
• Check
• Credit card
• Debit card
• Gift card
• Tangible or intangible tokens readily exchangeable for a fixed cash amount
• Other electronic settlement or mobile payment applications (excluding most digital assets) denominated in cash

Source: Tips must be received from customers, or, for employees, through a mandatory or voluntary tip-sharing arrangement (e.g., tip pool).

Voluntariness: Tips must be paid voluntarily by the customer and not subject to negotiation.

Not Qualified: Service charges (e.g., automatic 18% gratuity for large parties) that are imposed by the business and distributed to staff are not considered qualified tips if the customer cannot modify or disregard the charge.

Exclusions: Any amount received for illegal activity, prostitution services, or pornographic activity is not a qualified tip.

Example: A restaurant server receives $100 in cash tips, $50 in credit card tips, and $30 from a tip pool. The restaurant also distributes $40 to the server from an automatic 18% service charge on large parties. The $100 cash, $50 credit card, and $30 tip pool amounts are qualified tips. The $40 from the service charge is not a qualified tip.

4. How Does the Deduction Work?

For 2025 and later years, eligible workers may claim a deduction for the full amount of qualified tips received, thereby excluding those tips from federal gross income. The deduction is available regardless of whether the worker itemizes or claims the standard deduction.

Compliance Note: Employers are still required to report tips for payroll tax purposes unless and until further guidance is issued. The OBBB provision applies only to federal income tax, not Social Security or Medicare taxes, unless future regulations provide otherwise. Aldaris CPA can help you file your 2025 return correctly.

5. Public Comment and Finalization

The proposed regulations are open for public comment until October 23, 2025. Tax professionals and industry stakeholders are encouraged to review the occupation list and definitions, and to submit comments or requests for clarification via Regulations.gov.

Authority Trail

• Statute: OBBB (H.R. 1, 119th Congress), Public Law 119-21 (July 4, 2025) – “No Tax on Tips” provision (effective for tax years beginning after December 31, 2024)
• Proposed Regulations: IRS IR-2025-92, Sept. 19, 2025 (proposed regs listing qualifying occupations and defining “qualified tips”)
• IRS/Treasury Guidance: IR-2025-92, Sept. 19, 2025 (official press release and summary)

Pre-OBBB vs. Post-OBBB Comparison

Practical Next Steps

1. Review the Occupation List: Confirm whether your client’s job is included in the proposed regulations. If not, consider submitting a comment to Treasury/IRS before October 23, 2025.
2. Educate Clients and Employers: Inform eligible workers about the new deduction and the importance of tracking qualified tips separately from non-qualified payments (e.g., service charges).
3. Update Payroll and Accounting Systems: Employers should ensure that bookkeeping and payroll systems can distinguish between qualified tips and other compensation for reporting and compliance.
4. Monitor for Final Regulations: Watch for the finalization of the proposed regulations and any additional IRS guidance, especially regarding payroll tax treatment and documentation requirements.
5. Prepare for Documentation: Advise clients to maintain detailed records of tips received, including the form of payment and source, to substantiate the deduction in the event of an IRS inquiry.

Conclusion

The OBBB “no tax on tips” provision marks a significant shift in the tax treatment of tipped income for 2025 and beyond. By limiting the deduction to workers in specified occupations and to “qualified tips” as defined in the new regulations, Congress and the IRS have sought to balance simplicity, fairness, and compliance. Tax professionals should familiarize themselves with the new rules, educate affected clients, and prepare for changes in reporting and documentation. As always, staying current with the latest guidance and participating in the regulatory process will be key to effective client service in this evolving area. Aldaris is accepting new clients. Schedule a consultation to speak with a qualified CPA today!

References

• OBBB (H.R. 1, 119th Congress), Public Law 119-21 (July 4, 2025)
• IRS IR-2025-92, Sept. 19, 2025 (proposed regulations and occupation list)
• Congress.gov – H.R. 1 Text

This blog is intended for professional tax practitioners and should not be construed as legal or tax advice for any specific situation. For further details, consult the full text of the OBBB and the latest IRS guidance.

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