Last year, the Internal Revenue Service introduced a new income tax deduction for qualified cash tips under the One Big Beautiful Bill Act (OBBBA). The deduction is set to expire after 2028. In September 2025, the IRS issued proposed regulations to help guide taxpayers. The agency has now released final regulations that closely follow the proposed rules while adding several key clarifications and updates.
What Does the Deduction Cover?
Under the OBBBA, individuals may claim a tax deduction of up to $25,000 for “qualified tips,” whether they itemize deductions or not. The deduction begins to phase out once modified adjusted gross income (MAGI) exceeds $150,000 for single filers or $300,000 for married couples filing jointly. It is fully eliminated at $400,000 for single filers and $550,000 for joint filers. Married individuals filing separately are not eligible for the deduction.
The $25,000 cap applies per tax return, meaning married couples filing jointly cannot each claim a separate deduction. In addition, tips are still subject to federal payroll taxes and, where applicable, state income and payroll taxes.
“Qualified tips” generally include cash tips or equivalent payments, such as those made by check or credit/debit card, received in occupations that customarily and regularly accepted tips on or before December 31, 2024. The payment must be voluntary, with no penalty for not paying, and the amount must be determined solely by the customer without negotiation. Tips earned in certain specified service trades or businesses are excluded.
Key Highlights of the Final Regulations
The final regulations clarify several important areas, including:
Eligible Occupations
The proposed rules listed 68 qualifying occupations across eight categories. The final regulations expand this to 71 occupations by adding visual artists, floral designers, and gas pump attendants. The categories now include:
- Beverage and Food Service
- Entertainment and Events
- Hospitality and Guest Services
- Home Services
- Personal Services
- Personal Appearance and Wellness
- Recreation and Instruction
- Transportation and Delivery
Some categories were also broadened or clarified. For example, the “Transportation and Delivery” category now specifically includes app- or platform-based delivery workers.
The final rules also address digital content creators. Payments that provide customers access to content are treated as compensation for services, not tips. However, voluntary payments made after access is granted may qualify as tips.
Digital Assets
For now, digital assets are not treated as cash tips and therefore do not qualify for the deduction. However, the IRS stated it may reconsider the treatment of stablecoins in light of the GENIUS Act and any future legislation involving digital assets.
Voluntary Payments
The proposed regulations stated that mandatory service charges or automatic gratuities generally do not qualify as voluntary tips, even if later distributed to employees. To qualify, customers must have the ability to change or reject the amount added to the bill.
The final rules maintain this position but clarify that a payment is considered voluntary if the customer can reduce the tip to zero. For example, POS systems that allow customers to select “other” and enter $0 still satisfy the voluntariness requirement.
Any amount paid above a mandatory charge is treated as voluntary.
Managers and Supervisors
Tips received by managers or supervisors through tip pools or other tip-sharing arrangements do not qualify. However, tips paid directly to managers or supervisors for personally performing eligible tipped duties — such as serving tables during a busy shift — may qualify if all other requirements are met.
Anti-Abuse Rules
To prevent taxpayers from disguising wages or other income as tips, the proposed regulations disqualified tips paid by employers or businesses in which the recipient had an ownership interest. The final regulations take a more flexible approach.
Under the final rules, a payment will not qualify as a tip if the facts and circumstances suggest it was recharacterized as wages or payment for services solely to obtain the deduction. Indicators of improper recharacterization include:
- A service invoice showing a lower amount than the total payment, with the “tip” roughly matching the difference, or
- A significant change in historical tipping or payment practices between the payer and recipient.
The final regulations also create an automatic presumption that a payment is not a qualified tip if:
- The employer pays the “tip” directly to the employee, or
- The recipient has a direct ownership interest in the payer.
If you receive tips as part of your work, review the list of eligible occupations to see whether you may qualify for the deduction and plan accordingly. If you have questions about this tax break, contact us. We can help determine whether the tips you receive qualify for the deduction.
