IRS Issues Final Regulations on Qualified Tips 

The U.S. Department of the Treasury and the IRS recently released final regulations for the qualified tips deduction under Section 224, commonly referred to as the “no tax on tips” provision enacted under the One Big Beautiful Bill Act (OBBBA). The final regulations define “qualified tips” and identify occupations that customarily and regularly received tips on or before Dec. 31, 2024. The final regulations largely adopt the proposed regulations issued in September 2025 with targeted clarifications and modifications. The regulations are effective June 12, 2026, and apply to taxable years beginning after Dec. 31, 2024.

Background

Section 224, enacted by the OBBBA, allows a personal income tax deduction for qualified tips received in taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2029. The deduction is capped at $25,000 per return, with phase-outs for taxpayers whose modified adjusted gross income exceeds $150,000 ($300,000 for joint returns).

Shortly after release of the proposed regulations, the IRS issued Notice 2025-62, which provides filers with transition relief from information reporting penalties for 2025 with respect to qualified tips, and Notice 2025-69, which provides individuals with guidance for claiming the deduction for 2025.

Final regulations

The final regulations largely adopt the proposed definition of qualified tips:

• Tips must be cash tips. Under the proposed regulations, cash includes cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash. Cash tips do not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash. The definition of cash tips in the final regulations remains largely unchanged from the proposed regulations with the exception that the final regulations clarify that, for purposes of Section 224, cash tips also include amounts paid in foreign currency. Additionally, the final regulations provide that all digital assets (such as crypto assets and stablecoins) are excluded from the definition of cash tips.
• Payments must be voluntary, not negotiated, and determined by the customer. The final regulations maintain the position in the proposed regulations that automatic gratuities, such as service charges, are not qualified tips for purposes of the deduction – unless the customer is explicitly given the ability to modify or reduce the amount to zero.
• Occupations must be qualified. Tips must be received in an occupation that customarily and regularly received tips on or before Dec. 31, 2024.

Treasury tip occupation code (TTOC)

The proposed regulations included a table that lists occupations that customarily and regularly received tips on or before Dec. 31, 2024. Occupations are assigned a three-digit TTOC grouped together in general occupational categories. The final regulations generally keep the proposed list of occupations intact and add the following three occupations to the list:

• Visual artists (TTOC 509)
• Floral designers (TTOC 510)
• Gas pump attendants (TTOC 810)

In addition, several categories of TTOC were renamed or clarified. For example, “pet caretakers” became “pet and show animal caretakers,” “eyebrow threading and waxing technicians” became “eyebrow and eyelash technicians,” and “food servers, non-restaurant” was renamed “food and beverage servers, non-restaurant.” The final table and examples also clarify coverage for banquet staff, app-based delivery drivers, rideshare drivers, doormen, outdoor guides, and assistants or apprentices who perform the same services as the listed occupation.

The final regulations further clarify that while the list of occupations that receive tips is exhaustive, the illustrative examples of occupations that fit within each TTOC are not.

Crowe observation

Only tips received in the published occupations are eligible for the income tax deduction for qualified tips.

Exclusions from qualified tips

The proposed regulations outlined several important exclusions from the definition of qualified tips, including tips for illegal activities, pornography, and prostitution; payments to owners or employees from their own businesses; and tips received in the course of a specified service trade or business (SSTB) (generally accounting, consulting, performing arts, athletics, financial services, brokerage, health, law, and other professional service firms).

The final regulations confirm that tips received for illegal activities, prostitution services, and pornographic activities are not qualified tips under Section 224.

The final regulations replace the categorical disallowance of a Section 224 deduction if the tip recipient had an ownership interest in or was employed by the payer with anti-abuse rules, including a facts-and-circumstances anti-recharacterization rule aimed at arrangements that convert wages or service payments into purported tips. Additionally, a Section 224 deduction is disallowed if an employer pays the tip or if the tip recipient has a direct ownership interest of at least 5% in the payer.

The final regulations do not include a substantive rule addressing the SSTB exclusion. Instead, the final regulations reserve a section for future guidance.

Crowe observation

In the meantime, taxpayers can rely on the transition relief in Notice 2025-69, which provides that until guidance is provided, the IRS generally will treat a taxpayer as meeting the SSTB requirement if the tipped occupation appears on the list of occupations that receive tips.

Looking ahead

Employers should review the final list of occupations that receive tips to determine whether it has workers in occupations on that list for which qualified tips must be separately reported. While the final regulations provide clarity in a few areas, some areas remain in flux and warrant close attention. In particular, additional guidance is still needed on the application of the SSTB limitation, which could affect eligibility for certain workers currently relying on transition relief.

The IRS’ emphasis on anti-abuse rules and proper reporting also signals increased scrutiny of tip classification and documentation, making it important for both businesses and individuals to review compensation structures and reporting practices.