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The Internal Revenue Service (“IRS”) recently issued final regulations on the “No Tax on Tips” provisions of the 2025 One Big Beautiful Bill Act (“OBBBA”), establishing which workers may claim a deduction for tip income and clarifying qualifying payments.
What are Qualified Tips?
To qualify, a tip must be paid voluntarily, without negotiation or requirement, and determined solely at the customer’s discretion. Customers must have the ability to leave no tip at all. Payments imposed by the business, such as automatic gratuities or mandatory service charges, do not qualify. Tips received through a tip-sharing arrangement, such as tip pools, may qualify only to the extent that the underlying payment itself satisfies the requirement of being a voluntary tip.
List of Occupations
The final regulations list industries, whose employees’ tips are eligible for the deduction:
- 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
The regulations also include additional roles such as visual artists, floral designers, and gas pump attendants, and also clarifies coverage for modern service roles, including app-based delivery drivers and certain digital content creators.
For employers, the final regulations highlight the importance of carefully distinguishing between voluntary tips and mandatory service charges, particularly in industries such as hospitality, food service, and gig-based platforms. Employers should also ensure that their payment systems allow customers to adjust or decline tips, review tip pooling arrangements for compliance, and confirm that tip income is accurately reported on employee tax forms.
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