The Internal Revenue Service (IRS) has released proposed guidance detailing a new tax deduction for tipped workers, identifying nearly 70 professions that could be eligible. This move follows the recent passage of the “One Big Beautiful Bill Act,” which introduces a temporary tax break on tip income for the 2025 through 2028 tax years.
The proposed regulations, which are now open for public comment, aim to clarify which workers qualify and what constitutes a deductible tip. The agency is seeking feedback from the public and stakeholders before finalizing the rules.
Key Takeaways
- The IRS has proposed rules for a new tax deduction on tip income, affecting nearly 70 professions.
- Workers can deduct up to $25,000 in qualified tips annually, with income limits applying.
- The deduction is a result of the “One Big Beautiful Bill Act” and will be available for tax years 2025-2028.
- The IRS is accepting public comments on the proposed guidance until October 22, 2025.
New Legislation Introduces Tip Deduction
The foundation for this new tax provision is the “One Big Beautiful Bill Act,” which was signed into law on July 4. A key component of this legislation allows workers who receive regular tips to deduct this income from their federal taxes. This measure is intended to provide financial relief to individuals in service-oriented industries.
However, the deduction comes with specific limitations. The maximum amount a taxpayer can deduct in a single year is capped at $25,000. This ensures the benefit is targeted and does not create an unlimited tax shelter.
Income Phase-Out Rules
The deduction is also subject to income restrictions. The benefit begins to phase out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 for single filers. For those filing jointly, the phase-out threshold is $300,000. This structure targets the tax relief toward low-to-moderate income earners.
The provision is temporary and will apply to tax filings for the years 2025, 2026, 2027, and 2028. The IRS is now tasked with creating the regulatory framework to implement the law effectively.
IRS Proposes Framework for Eligibility
To implement the new law, the IRS has issued proposed guidance and is actively seeking public input. This feedback period is a standard part of the regulatory process, allowing individuals, businesses, and industry groups to voice concerns or suggest improvements. The deadline for all comments is October 22, 2025.
The agency's proposal uses the Treasury Tipped Occupation Code to systematically categorize eligible workers. This coding system helps create a clear and organized list of professions that will qualify for the tax break.
A total of 68 professions are currently on the proposed list, grouped into eight distinct categories. This classification covers a wide range of service industries where tipping is a common practice.
Eight Categories of Tipped Professions
The proposed guidance organizes the 68 eligible occupations into the following eight major groups, identified by their Treasury Tipped Occupation Code series:
- 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
Defining a 'Qualified Tip'
A central part of the IRS guidance is the precise definition of what constitutes a “qualified tip” eligible for the deduction. This clarity is crucial for taxpayers to correctly claim the benefit and for the agency to enforce the law.
According to the proposal, a qualified tip must meet several criteria. First, it must be paid in cash or a cash equivalent. This includes payments made by check, credit card, debit card, or gift card. Modern payment methods such as mobile payment apps and other electronic settlements are also included, provided they are denominated in cash. However, most digital assets like cryptocurrencies are explicitly excluded.
The tip must also be received directly from a customer. For employees, this can also include tips distributed through a mandatory or voluntary tip-sharing arrangement, such as a tip pool. This acknowledges common industry practices where tips are collected and then shared among staff.
Voluntary Payments vs. Mandatory Charges
A critical distinction made in the proposed rules is between voluntary tips and mandatory service charges. To be considered a qualified tip, the payment must be voluntarily made by the customer, with the amount not subject to negotiation.
The IRS provides a specific example: if a restaurant automatically adds an 18% service charge for large parties and the customer has no option to modify or remove it, the money distributed to staff from that charge is not a qualified tip. It is considered a service charge, which is treated as regular wages.
This distinction is important because service charges are already taxed as standard income, whereas the new law creates a special deduction specifically for voluntary gratuities.
Exclusions and Final Considerations
The IRS proposal also outlines specific exclusions. Any amount received for illegal activities is explicitly disqualified from being considered a qualified tip. This includes income from services related to prostitution or pornographic activities.
The temporary nature of the deduction means that eligible workers and their employers should prepare for changes to tax filing procedures starting with the 2025 tax season. Financial advisors and tax professionals will need to become familiar with the new rules to guide their clients accurately.
The public comment period running until late 2025 provides a window for industries and workers to influence the final regulations. The feedback received will help the IRS refine the definitions and eligibility lists to ensure the law is implemented as intended by Congress. Once finalized, the regulations will provide a clear roadmap for millions of American workers in tipped professions.
