IRS Finalizes Rules on Occupations Eligible for OBBBA No Tax on Tips
The One Big Beautiful Bill Act (OBBBA) introduced a significant new tax deduction for workers related to qualified tip income, effective for tax years 2025 through 2028. Treasury and the IRS on April 10 issued final regulations (T.D. 10044) clarifying which occupations customarily and regularly receive tips for purposes of the OBBBA deduction.
Up to $25,000 in “qualified tips” per year is allowed as a deduction on an individual’s Form 1040 for calendar years 2025 through 2028, regardless of whether the individual itemizes deductions. This limit applies regardless of filing status, and there are also adjusted gross income phaseouts. Tips must also be reported (for example, on Forms W 2 or 1099, or by the worker on Form 4137 to support the deduction).
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Although the deduction is for individuals, it has important implications for many businesses at the entity level. The new rules will be particularly relevant for the hospitality industry, but the IRS interpreted qualified occupations broadly, and businesses in other industries may have employees or independent contractors who qualify.
IRS List of Tipped Occupations
The final rules include more than 70 occupations, organized into eight broad categories, including:
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 IRS expanded the list from the one in the proposed regulations to include additional roles such as visual artists, floral designers, and gas pump attendants, signaling broader eligibility than many employers expected. Only workers in occupations included in this IRS list are eligible to claim the deduction.
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Individuals generally cannot take the deduction unless an employer reports the tips to them on Form W-2 or Form 1099-NEC, so employers will be responsible for determining whether an occupation qualifies. Most of the listed occupations are fairly broad categories and include “illustrative examples.” The IRS added several new examples in response to comments and said it believes the list “in most instances, is sufficiently specific to provide clarity.” The illustrative examples are not an exhaustive list, however, and there may be distinctive jobs that are not explicitly described in an example. Employers will need to make reasonable determinations whether a job description fits under one of the broader listed occupations. The IRS said it intends to interpret the occupations in “a fair and impartial manner consistent with their commonly understood meaning.”
What Counts as “Qualified Tips”?
To be deductible under the OBBBA, tips must meet strict IRS criteria. Specifically, the tips must be:
Paid voluntarily by customers, not negotiated or mandatory
Paid in cash or cash equivalent forms (such as credit cards, debit cards, gift cards, or mobile payments)
Received directly or through a tip sharing or tip pool arrangement
Importantly, mandatory service charges — such as automatic gratuities on large parties — do not qualify as tips if the customer cannot modify or decline the charge, even if the amounts are later paid to workers.
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The IRS rejected calls to expand qualification to include mandatory service charges, even in limited or specific circumstances. If a point-of-sale payment system offers suggested tips or tip options, the customer must have the ability to provide zero or no tip for the tips to qualify for the deduction. Employers should consider the implications for their mandatory tip and service charge policies. To the extent employers want tips to qualify, they should confirm that any point-of-sale payment systems allow customers to decline tips.
New Employer Reporting Requirements
To support the deductions that eligible individuals can take for qualified tips on their 2026-2028 personal federal income tax returns (Form 1040), the OBBBA requires employers to separately identify:
Qualified tip income
The qualifying tipped occupation
These requirements affect Forms W 2 and 1099 NEC, as well as the related statements furnished to workers.
Next Steps
Employers were not required to report information regarding qualifying tip income for 2025, due to IRS transition relief (see IRS Announces 2025 Tip and Overtime Reporting Relief). Reporting will be required for 2026, so employers should already be identifying and tracking qualified tips. Employers should also be ready to make several important entity-level determinations, including whether an occupation qualifies, whether a service charge is voluntary, and whether the business is a specified service trade or business under Section 199A. The IRS did not provide any guidance on the Section 199A determination, and transition relief remains available until final regulations on this issue take effect.
Written by Thomas LeClair and Norma Sharara. Copyright © 2026 BDO USA, P.C. All rights reserved. www.bdo.com
