Proposed Regulations Released on Qualified Tips

On Sept. 22, the U.S. Department of the Treasury and the IRS released proposed regulations on the income tax deduction for qualified tips under the new Section 224 that was enacted as part of the One Big Beautiful Bill Act (OBBBA). The proposed regulations provide guidance on the list of occupations eligible for the income tax deduction as well as a definition of qualified tips. Taxpayers may rely on the proposed regulations for taxable years beginning after Dec. 31, 2024, until final regulations are published, provided that the proposed regulations are followed in their entirety and in a consistent manner.

Background

Section 224 temporarily permits an individual income tax deduction for qualified tips that are included on Forms W-2, “Wage and Tax Statement,” 1099-K, “Payment Card and Third Party Network Transactions,” 1099-MISC, “Miscellaneous Information,” or 1099-NEC, “Nonemployee Compensation,” or reported by the taxpayer on Form 4137, “Social Security and Medicare Tax On Unreported Tip Income.” Effective from Jan. 1, 2025, through Dec. 31, 2028, up to $25,000 of qualified tips can be deducted, with phase-outs for taxpayers whose modified gross income exceeds $150,000 ($300,000 in case of a joint return). Section 224 defines qualified tips as cash tips received by an individual in an occupation that customarily and regularly received tips on or before Dec. 31, 2024. In addition, qualified tips must be paid voluntarily without any consequence in the event of nonpayment, cannot be subject to negotiation, and must be determined by the payer.

The OBBBA required the Treasury secretary to publish a list of qualifying occupations by Oct. 2, 2025 (within 90 days of enactment of the act). The proposed regulations issued include a table with a list of qualifying occupations.

Qualifying occupations under the proposed regulations

The proposed regulations include a table that lists occupations that customarily and regularly received tips on or before Dec. 31, 2024. Only these occupations are eligible for the income tax deduction for qualified tips. The occupations are organized according to a new categorization system created by Treasury and the IRS specifically for qualified tips. Under the new system, occupations are assigned a three-digit code called a “Treasury tipped occupation code” or TTOC, grouped together in the following general occupational categories:

• 100s – Beverage and food service
• 200s – Entertainment and events
• 300s – Hospitality and guest services
• 400s – Home services
• 500s – Personal services
• 600s – Personal appearance and wellness
• 700s – Recreation and instruction
• 800s – Transportation and delivery

The “List of Occupations That Receive Tips” also provides the TTOC occupation title for each occupation code, a short description of the services performed by individuals working in an occupation included in the code, as well as illustrative examples of specific occupations included under the occupation code.

Proposed regulation definition of qualified tips

The proposed regulations define qualified tips as cash tips. Cash tips are defined as tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are paid in a cash medium of exchange, including by 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 (in other words, most digital assets).

Additionally, the proposed regulations provide that tips are amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to be paid for the services in an arm’s-length transaction.

The proposed regulations provide various exclusions from qualified tips, including:

• Service charges, automatic gratuities, and other mandatory amounts automatically added to a customer’s bill (unless the customer is provided an option to disregard or modify the amount)
• Tips for illegal activities, pornography, or prostitution
• Payments to owners or employees from their own businesses
• 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)

Crowe observation

The exclusion of qualified tips received in the course of an SSTB creates apparent conflict with the “List of Occupations That Receive Tips.” For example, dancers, musicians, and singers are among the approved list of occupations in the proposed regulations, but these occupations also appear to fall under the SSTB of performing arts. Additional guidance is needed to determine how the interaction between the approved list of occupations and an SSTB apply to qualified tips under Section 224.

No changes to reporting or withholding for 2025

While the OBBBA provides the Treasury secretary with authority to specify a reasonable method for employers and payers to create and furnish a separate accounting of qualified tips on Forms W-2, 1099-K, 1099-MISC, or 1099-NEC for the 2025 calendar year, as of Oct. 23, no guidance to implement these provisions has been issued.

The IRS announced that it will not make changes to 2025 information returns or withholding tables to account for the new law. Existing Form W-2, Form 1099, Form 941, and other payroll return forms will remain unchanged for tax year 2025. However, the IRS recently released the 2026 draft Form W-2, which includes new box 14b to report the TTOC and new box 12 code TP for “Total amount of cash [qualified] tips.”

Looking ahead

Employers should review the “List of Occupations That Receive Tips” to determine whether they employ workers with occupations that are included. While employers wait for additional guidance on how to report qualified tips for tax year 2025, it is prudent to begin accumulating and tracking qualified tips now to ease implementation once guidance is issued. In addition, employers should begin working with their payroll providers or consider updating their current payroll systems to allow for such tracking.