The IRS and the U.S. Department of the Treasury have announced new guidelines on the taxation of tipped employees in accordance with the One Big Beautiful Bill (H.R. 5376). The guidance defines tips in terms of deductibility and reporting education. This type of definition is extremely important for taxpayers and employers alike to ensure tax compliance.
The guidance lists approximately 70 occupations and industries under eight types in which tipped employees are employed, including food service, hotels/motels, recreational services, personal services, and transportation services. The type of categorization will determine whether one can deduct the income from tips and fair tax treatment. The Treasury and IRS comment period is open through October 23, 2025, and encourages stakeholder engagement on compliance and enforcement issues.
What Are Qualified Tips?
A central feature of the IRS guidance is a clear, detailed definition of “qualified tips.” According to the IRS, qualified tips must meet the following criteria:
- They must be cash or a comparable medium of payment, which can be checks, credit or debit cards, gift certificates, or other electronic payment methods that can easily be transformed into cash. Of course, this would exclude most digital assets such as cryptocurrencies.
- They must be paid directly from customers or through a tip pool or sharing that is either voluntary or mandated among employees.
- Tips must be voluntary payments from customers and cannot be negotiable. That is, automatic service charges that are provided without customer choice do not qualify as tips even if they are distributed to waitstaff.
- If tips come directly from illegal activity, including prostitution and pornographic activity, they are also considered excludable qualified tips.
The extensive definitions are meant to separate qualified tips from other payments as the basis of deduction and fairness in a tax liability. It also communicates to both workers and businesses what needs to be included as part of tax reporting, and the deduction of tips can be appropriately and accurately claimed.
Occupations Where Workers Regularly Receive Tips
The categories that comprise the Treasury Tipped Occupation Code system classify the occupations that typically receive tips into eight general groupings for clarity and ease of administrative functions. Below is a brief description of the categories, including some example occupations that would qualify:
- Beverage and Food Service (100s): Bartenders, waiters, bussers, food servers, baristas, and restaurant hosts.
- Entertainment and Events (200s): Musicians, comedians, stagehand crew employees, and parking lot attendants.
- Hospitality & Guest Services (300s): Hotel bellhops, valet attendants, housekeeping, and concierge services.
- Home Services (400s): Housekeepers, gardeners, cleaning staff, and delivery staff specializing in direct services in the home.
- Personal Services (500s): Hairstylists, masseurs, manicurists, dog walkers.
- Personal Appearance & Wellness (600s): Barbers, salon staff, fitness instructors, and spa staff.
- Recreation & Instruction (700s): Golf caddies, ski instructors, tour guides, and dance instructors.
- Transportation and Delivery (800s): Taxi drivers, freedom water taxi operators, van drivers for shuttles, and couriers for deliveries.
A comprehensive list of qualifying occupations helps employees and employers alike to better understand who can claim a tip income deduction, almost eliminating confusion in an ordinary or common tipping scenario.
Implications of the New Guidance for Taxpayers and Employers
Broadly speaking, this guidance implies employer responsibilities to weigh tip income and protect both workers' rights and tax charges. The guidance governs employers in maintaining records of tip income paid to employees and may affect their payroll practices, tax reporting, or tip pooling. The clarity surrounding tip income will help employees accurately file their tax returns and claim deductions to which they are entitled.
Employers should survey their arrangements for sharing tips to see if they fall into voluntary (or state) or mandatory categories and then separate all tips reported from any automatic service charges for proper reporting.
An erroneous report of tip income from a taxpayer may invoke an audit and penalties; thus, compliance with the new rule reduces taxpayer risk. It is also equally important for workers to ensure that all qualifying tips are received and accounted for properly to claim the relevant deductions and avoid the overpayment of tax.
How to Comply with the Qualified Tips Regulations
Compliance begins with precise record keeping of all payments made as gratuities. Employers should maintain detailed record keeping of daily totals of gratuities received from cash, through card readers, and electronically. Moreover,
- Create clear policies for any tip-pool arrangements, and specify if the arrangements are mandatory or voluntary.
- Train workers to understand what a qualified tip is and how it will be recorded.
- Use payroll systems consistent with IRS guidance to categorize tips appropriately as wages.
- Accurately track service charges as separate from tips to avoid misclassification.
Employees must report to their employers the total amount of all qualified tips received each month so that the employers can maintain compliance and protect themselves from liability. Furthermore, employers are responsible for reporting accurately to the IRS on employee Form W-2s, and properly reporting tip income.
Future Outlook and Public Comment Process
The IRS and Treasury extend an invitation to interested parties, including employees, employers, and industry organizations to provide comments within 30 days of the release of the proposals (By October 23, 2025). Comments received during this process will help inform the finalization of regulations and potentially modifications of tip taxation policies.
- The open-comment period reflects the government’s sincere commitment to transparency and inclusion.
- More importantly, the open-comment process provides interested parties with the opportunity to express their concerns regarding implementation, fairness, and administrative burdens.
- After consideration of public comments, any final regulations will be made available, which will likely provide greater clarity over definitions and administrative requirements.
Helpful Links
- IRS Final Roth Catch-Up Rules under SECURE 2.0
- How Professional Bookkeeping Helps You Stay IRS Audit-Ready
- IRS Cracks Down on Tax Scams Linked to Social Media: Penalties Soar
Compliance monitoring, as reported by payroll processing professionals, vendors providing payroll services, and professionals providing human resource services to employers, must pay attention to this process to ensure policies and software are adjusted to comply with the final regulations.
The IRS’s recent guidance on qualified tips and tipped occupations, as set forth in the One Big Beautiful Bill, gives much-needed clarification to a complex area within the sector of taxation.
For employees, the new guidance will provide clarity on how to deduct qualified tips and what tips are qualified to deduct. For employees, the IRS guidance provides a better understanding by clarifying which occupations - and therefore income - should be recorded for tips, in addition to the payments made.
Contact The Fino Partners today to get more such recent news on IRS updates and guidelines.
