Do you earn tips? Do you employ workers who earn tips? You will want to read up on the Treasury’s newly published preliminary list to see if you can benefit from the new tip deduction under the OBBBA.

What is the Federal Tip Deduction?

IRC 224 allows a federal income tax deduction of up to $25,000 for qualified tips for employees and independent contractors. Phases out for AGI over $150,000 ($300,000 joint). Both itemizers and non-itemizers can claim it.

What Tips Qualify?

Any cash tip received by an individual in an occupation that customarily and regularly received tips on or before Dec. 31, 2024 qualify for the deduction. This excludes certain trades like healthcare, performing arts, and athletics.

What are the Reporting Requirements?

Individuals receiving tips must report their occupation and cash tips on Forms 1099 and W-2 starting with calendar year 2025, though reporting on Forms W-2 officially begins Feb. 1, 2027 for 2026 wages. 

What Occupations are Included in the Preliminary List?

Check out the full list here: Preliminary Occupation List. Occupations include: 

• Beverage & Food Service: bartenders, servers, chefs, cooks, bakers, dishwashers, host staff, etc.
• Entertainment & Events: musicians, dancers, DJs, entertainers, digital content creators, ushers, ticket takers, gambling workers, etc.
• Hospitality & Guest Services: concierges, desk clerks, bellhops, maids, housekeeping cleaners.
• Home Services: electricians, plumbers, HVAC technicians, locksmiths, maintenance workers, roadside assistance workers, landscapers, cleaners.
• Personal Services & Wellness: massage therapists, barbers, hairstylists, makeup artists, fitness instructors, skincare specialists, tattoo artists, tailors, shoemakers.
• Recreation & Instruction: golf caddies, tour guides, instructors, pilots.
• Transportation & Delivery: taxi and rideshare drivers, shuttle drivers, valet attendants, delivery workers, boat and bus operators, movers.

What Should Employers do to Prepare for These Changes?

Though not required, employers may voluntarily provide tip reporting for 2025 to help employees claim the deduction.

Employers will also want to pay attention to emerging occupations like digital content creators are included, reflecting modern tipping practices.

Taxpayers and employers may submit comments on occupations or reporting challenges when the proposed regulations are published.

FAQs- Tip Deduction

1. When does the tip deduction take effect? 

   It applies to tax years 2025 through 2028.

2. Who can claim the tip deduction? 

   Employees and independent contractors in approved tip-based occupations. Both itemizers and non-itemizers can claim it.

3. What’s the maximum tip deduction? 

   The deduction is up to $25,000, subject to income phase-outs.

4. Are all types of tips included? 

   Only cash tips qualify. Other forms (e.g., gifts, non-cash items) do not.

5. What should I do if my occupation isn’t on the list? 

   You may submit comments when Treasury publishes the official proposed list in the Federal Register.

Looking for guidance on OBBBA? Get updates, planning tips, and helpful resources here: One Big Beautiful Bill Act (OBBBA) Resource Center