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IRS and Treasury are making progress on the rule making from OBBBA. IRS has published their proposed rule on income tax on tips. The primary focus of the regulation is defining qualified tip and occupation. This is not firm and final; the proposal is open for public comment. If you have a strong opinion, engage!

Attached is the proposal from the federal register. Some of the definitions get fairly technical specifically with what is considered an “occupation that customarily and regularly receives tips”. For the most part, the IRS defaulted to the FLSA on their definition.

Also attached is draft example of 2026 W2. This include the 12a classifications that have to be reported on cash tips and qualified overtime. The forms too, are out for comment.

Key provisions on REG-110032-25

Effective dates: The deduction for qualified tips is available for tax years beginning after December 31, 2024, and before January 1, 2029. The proposed regulations apply during this period.

Eligible occupations: (see page 11 of reg) The regulations include a list of nearly 70 occupations that customarily and regularly received tips as of December 31, 2024. These occupations, which include categories such as food and beverage, hospitality, personal services, and transportation, are identified using new Treasury Tipped Occupation Codes.

Qualified tips: The NPRM defines "qualified tips" as those paid voluntarily by the customer, in cash or an equivalent electronic form, and not subject to negotiation. Service charges do not qualify. IE: catering tips and parties over 5 mandatory tips.

Deduction limitations: The maximum annual deduction is capped at $25,000. This amount begins to phase out for taxpayers with modified adjusted gross income exceeding $150,000 ($300,000 for those filing a joint return). The deduction is not available for married individuals who file separately.

Exclusions: Tips received in connection with an illegal activity or from an individual with an ownership interest in the business do not qualify for the deduction. Tips received by performing artists operating a Specified Service Trade or Business (SSTB) are also excluded, unless the artist is an employee. Automatic service charges are generally not considered qualified tips.

-An example of illegal activity in the reg says that if a bartender is required to have a license to serve alcohol and earns tips while unlicensed, those are not qualified under the exemption.

FICA taxes: Importantly, the NPRM clarifies that employees who claim the deduction must still pay Social Security and Medicare payroll taxes (FICA) on their tip income. 

Comments and public hearing: The proposed regulations were published on September 22, 2025. The IRS and Treasury are accepting public comments on the proposal until October 22, 2025, with a public hearing scheduled for October 23, 2025.