IRS final rule expands definition of qualified tips and covered occupations

The Internal Revenue Service (IRS) recently issued a Final Rule clarifying the definition of qualified tips under the “No Tax on Tips” provision of the One Big Beautiful Bill Act (OBBBA). The rule also adds floral designers, visual artists and gas pump attendants to the list of occupations that customarily and regularly receive tips.

What counts as “qualified tips”?
Qualified tips are cash tips received by individuals working in eligible occupations. To qualify, tips must

• be voluntarily given without any consequence if not paid,

• not be negotiated,

• not be earned in a specified service trade or business (as defined under Section 199A(d)(2)), and

• meet any additional IRS requirements issued through future guidance.

The IRS notes that “cash” includes

• physical cash and checks,

• credit and debit card payments,

• gift cards,

• digital and mobile payment apps (e.g., electronic transfers), and

• tokens or credits that can be easily converted to cash.

Tips received through mandatory or voluntary tip-sharing arrangements qualify. However, automatic gratuities or service charges do not qualify as they are not voluntarily given by the payer.

Effective for tax years 2025 through 2028, eligible individuals may deduct up to $25,000 in qualified tips annually. Eligibility is limited to occupations that customarily received tips on or before December 31, 2024, limiting the ability to reclassify roles to take advantage of the deduction.

Employers should review payroll and reporting processes to ensure tips are clearly distinguished from service charges, tip-sharing arrangements are properly documented, and all forms of tipped compensation are accurately tracked and reported to the IRS.