Final Regs Expand List of Occupations for Qualified Tips Deduction

(Parker Tax Publishing May 2026)

The IRS issued final regulations under Code Sec. 224 on the deduction for qualified tips received by taxpayers in occupations that customarily and regularly received tips. The final regulations provide clarification on the definition of qualified tips and expand the list of occupations that qualify for the deduction to include visual artists, floral designers, and gas pump attendants. The final regulations do not address the specified service trade or business exclusion (SSTBs), and thus the transition relief provided in Notice 2025-69 remains in effect. T.D. 10044.

Background

The One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21) added new Code Sec. 224 providing an income tax deduction for "qualified tips" that are received during the tax year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. The OBBBA added the deduction provided by Code Sec. 224 to the list of deductions used to determine taxable income in Code Sec. 63(b).

Specifically, Code Sec. 224(a) provides for a deduction in an amount equal to the qualified tips received by an individual in a tax year that are: (1) included on a Form W-2, Wage and Tax Statement, under Code Sec. 6051(a)(18); (2) included on a 1099 form under Code Sec. 6041(d)(3), Code Sec. 6041A(e)(3), or Code Sec. 6050W(f)(2); or (3) reported by the taxpayer on Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

Code Sec. 224(b)(1) limits this deduction to an amount not to exceed $25,000 in a tax year. Code Sec. 224(b)(2) further limits the amount of the deduction based on a taxpayer's modified adjusted gross income, which is a taxpayer's adjusted gross income for the tax year increased by any amount excluded from gross income under Code Secs. 911, 931, or 933. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Code Sec. 224(c) provides that, in the case of qualified tips received by an individual during any tax year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips are taken into account under Code Sec. 224(a) only to the extent that the gross income for the taxpayer from such trade or business for such tax year (including such qualified tips) exceeds the sum of the deductions allocable to the trade or business in which such qualified tips are received by the individual for such tax year.

Code Sec. 224(d)(1) defines "qualified tips" as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Treasury Secretary. Code Sec. 224(d)(2) further requires that qualified tips not include any amount received by an individual unless the amount:

Is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor;

Is not received in the course of a trade or business that is a specified service trade or business (SSTB) as defined in Code Sec. 199A(d)(2); and

Satisfies such other requirements as may be established by the Treasury Secretary in regulations or other guidance.

Code Sec. 224(d)(2) further provides that, for purposes of determining whether amounts are received in the course of a trade or business that is an SSTB, in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual is treated as receiving tips in the course of a trade or business which is an SSTB if the trade or business of the employer is an SSTB.

Code Sec. 224(d)(3) provides that for purposes of Code Sec. 224(d)(1), the term "cash tips" includes tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement. Code Sec. 224(e) provides that no deduction is allowed under Code Sec. 224 unless the taxpayer includes his or her social security number (SSN) on his or her tax return.

Code Sec. 224(f) provides that if the taxpayer is married, Code Sec. 224 applies only if the taxpayer and the taxpayer's spouse file a joint return for the tax year. That is, the deduction is not available for a taxpayer who is married and files separately.

Code Sec. 224(h) provides that no deduction is allowed under Code Sec. 224 for any tax year beginning after December 31, 2028.

In September of 2025, the IRS issued proposed regulations under Code Sec. 224 (REG-110032-25) that identified occupations that customarily and regularly received tips on or before December 31, 2024, and that provided a definition of "qualified tips" for purposes of Code Sec. 224. In November of 2025, the IRS released Notice 2025-62, providing penalty relief for certain 2025 information reporting related to the deduction for qualified tips. In addition, Notice 2025-69 provided guidance regarding how individuals satisfy the requirements under Code Sec. 224 for tips received in 2025. Notice 2025-69 also provided transition relief for taxpayers regarding the requirement that qualified tips must not be received in the course of a qualified trade or business.

T.D. 10044

On April 13, the IRS published final regulations under Code Sec. 224. The final regulations adopt the proposed regulations with modifications based on over 300 comments received by the Treasury Department and the IRS.

Changes to List of Occupations That Receive Tips

Like the proposed regulations, the final regulations provide that only qualified tips received in connection with the occupations on the List of Occupations that Receive Tips are eligible for the deduction under Code Sec. 224(a).

The final regulations expand the list of occupations to include "Visual Artists" (Treasury Tipped Occupations Code (TTOC) 509) and "Floral Designers" (TTOC 510) in the Personal Services category, and gas pump attendants in the transportation and delivery category. The final regulations also include "doorman" as an example under "Baggage Porters and Bellhops" (TTOC 301) and revised the category "Eyebrow Threading and Waxing Technicians" to read "Eyebrow and Eyelash Technicians" (TTOC 606). In addition, the category "Food Servers, Non-restaurant" (TTOC 103) was changed to "Food and Beverage Servers, Non-restaurant."

In response to a comment regarding the tax consequences when managerial staff or owners participate in tip pools, the final regulations provide that amounts received by a manager or supervisor through a voluntary or mandatory tip-sharing arrangement such as a tip pool are not qualified tips. However, the final regulations also clarify that amounts received directly by a supervisor or manager for services they provided in the course of duties performed in an occupation that customarily and regularly receives tips are qualified tips if all other requirements for qualified tips are met.

Requirement That Tips Be Voluntary

The final regulations maintain the position in the proposed regulations that automatic gratuities, such as service charges, are not qualified tips because they are not voluntary. The IRS received comment regarding whether contractual arrangements that include suggested tips for services before they are provided are voluntary tips. One commenter asked for clarification as to what "without consequence" means. Prop. Reg. Sec. 1.224-1(c)(3) (Example 8) described a contract with varying prices depending on whether a tip was included. The failure to agree to a specific tip amount resulted in a higher price for the service. Accordingly, nonpayment of the tip was not "without consequence" in this situation (because nonpayment resulted in a higher price). If the contract terms merely added the discretionary tip as a "convenience" for the customer, subject to the customer's agreement, the tip would be voluntary.

According to the IRS, the determination of whether the failure to pay a tip is made "without consequence" will depend on the facts and circumstances of a particular situation. However, the final regulations clarify that situations where nonpayment of a tip is without consequence include situations where nonpayment of the tip does not have any impact on the scope or cost of the service. The final regulations also contain a new example where the tip is part of the contract that is entered into before the services are provided. The example concludes that the tip is a qualified tip because it is paid without consequence. If the customer had chosen to not pay the tip then the scope or cost of the service would not have been affected.

In addition, the final regulations clarify when payments to digital content creators are tips and when they are compensation. Under the final regulations, customer payments to a digital content creator that enable customers to gain access to the creator's content are not tips but rather compensation for services provided. The final regulations also provide that tipping digital content creators through audience engagement mechanisms that result in superficial digital rewards, such as highlighted messages or other digital tokens of appreciation of negligible value, do not disqualify an otherwise qualified tip.

Unreported Tips

Several commenters asked that the final regulations clarify whether tips that are not reported on an information return because, for instance, the tip is provided in cash to an independent contractor or is below the required reporting threshold for certain information returns, are qualified tips. The final regulations clarify that amounts received as a tip that are not separately reported to an individual on a statement furnished to the individual pursuant to Code Sec. 6041(d)(3), Code Sec. 6041A(e)(3), Code Sec. 6050W(f)(2), or Code Sec. 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor) are not eligible for the deduction under Code Sec. 224. However, as noted above, transition relief for 2025 was provided in Notice 2025-69.

Transition Relief for the SSTB Exclusion Remains in Effect

The final regulations do not address the specified service trade or business (SSTB) exclusion under Code Sec. 224, but Reg. Sec. 1.224-1(g) is reserved for guidance on this exclusion. Under the proposed regulations, an amount received by an individual in the course of an SSTB would not be a qualified tip. However, as stated in Notice 2025-69, it may be difficult for taxpayers to determine whether their tips were received in the course of an SSTB. Accordingly, the notice provides that until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is an SSTB for purposes of section 224, the IRS will treat an employee as having received tips in the course of a trade or business that is not an SSTB if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024.

Because the final regulations in T.D. 10044 do not address the SSTB issue, the transition relief provided in Notice 2025-69 remains in effect.

Anti-Abuse Rules

The proposed regulations would have provided that a payment is not a qualified tip if the tip recipient has an ownership interest in or is employed by the payor of the tip. The final regulations replace this rule with a provision stating that an amount is not a qualified tip, and thus not eligible for the deduction if, based on all relevant facts and circumstances, the amount represents a recharacterization of wages or payments for goods or services for purposes of claiming the deduction. The final regulations further provide that facts and circumstances that may indicate a recharacterization of wages, payment for services, or other income as tips include:

A charge for services provided in an invoice is less than the payment from the payor shown on a related receipt or information return, and the cash tip reported on the receipt or information return is in an amount that approximates the difference between the charge amount on the invoice and payment amount on the receipt or information return; and

A significant shift in historical tipping or payment practices between the payor and the tip recipient.

In addition, the final regulations provide that if the following facts and circumstances are present, there is an irrebuttable presumption that the amount paid reflects a recharacterization of wages, payment for services, or other income as tips, and therefore cannot be a qualified tip:

The employer of an employee is the payor, as defined in Reg. Sec. 1.224-1(c)(5) of the final regulations, of a cash tip received by the employee.

The tip recipient has a direct ownership interest in the payor, as defined in Reg. Sec. 1.224-1(c)(5) of the regulations, of a cash tip.

The final regulations define ownership interest to mean, in the case of a corporation, ownership (by vote or value) of five percent or more of the stock in such corporation; in the case of a partnership, ownership of five percent of the profits interest or capital interest in such partnership, or in any other case, ownership of more than five percent of the beneficial interests in the entity. An ownership interest is tested as of the date the tip is received. The final regulations also provide that an ownership interest is a direct ownership interest if it is an ownership interest held directly by the tip recipient or if it is an ownership interest held through an entity disregarded as separate from its owner for federal income tax purposes; an ownership interest held through a qualified subchapter S subsidiary; an ownership interest held through a grantor trust; or an ownership interest held through a custodian, broker, nominee, agent, or other similar intermediary.

For a discussion of the qualified tip deduction, see Parker Tax ¶81,700.

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