Proposed OBBB Regulations Issued for the Tip Tax Deduction

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  • Proposed regulations issue clarifying requirements for tip tax deduction.
  • Qualified tips must be received in customarily tipped jobs, received as cash, and paid for voluntarily.

Discussion

The Treasury Department recently issued proposed regulations to implement the tip tax deduction created under the One Big Beautiful Bill. Specifically, individuals may take up to a $25,000 tax deduction on their income tax returns for qualifying tips received in the taxable year, which amount may be reduced by $100 for every $1,000 earned by which the adjusted gross income exceeds $150,000 ($300,000 for married couples filing jointly).

 

The proposed rule explains the requirements necessary for tips to be qualified for the tax deduction:

 

  • Qualified tips must be received in customarily tipped jobs. The proposed rule incorporates the previously released draft list of 68 customarily tipped jobs that are eligible for the tip deduction.

 

  • Amounts must be received as cash. This 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. Excluded payments are 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 (such as most digital assets).

 

  • Tips must be paid voluntarily and without any consequence in the event of nonpayment, are not the subject of negotiation, and are determined by the payor. Mandatory amounts automatically added to a customer’s bill by the vendor or establishment are not qualified tips. For example, a mandatory percentage added to a service bill is not a qualified tip. The customer must have the option not to pay a tip when paying an invoice or bill.

 

  • Tips are not payment for the price of services performed. They must be in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm’s-length transaction.

 

  • Qualified tips do not involve illegal activity, prostitution, or pornography.

 

  • Tips received by employees with ownership interest in or employed by the tip payor are not qualified.

 

Additionally, employees who enter into a Tipped Employee Participation Agreement as part of the Tip Reporting Determination Agreement (TRDA) program or a Model Gaming Employee Tip Reporting Agreement as part of the Gaming Industry Tip Compliance Agreement (GITCA) program may determine the amount of qualified tips using the applicable tip rate in their agreement (and amounts reported on Form 4137) in lieu of reporting actual tips received.

 

The proposed rule provides a number of examples to further explain these requirements. Employers should review the proposed rule for further guidance. It is unclear what the timing will be for approving the proposed rule in light of the current government shutdown. Employers should continue to monitor the situation for updates.

 

Action Items

  1. Review the proposed rule here.
  2. Prepare to calculate qualified tips received in 2025 for disclosure on tax reporting forms.

 

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2025 ManagEase