Key Takeaways

  • The IRS issued final regulations clarifying which occupations can claim tax deductions on tip wages, covering industries such as food and beverage services, entertainment and events, hotel and guest services, household and personal services, personal appearance and wellness, leisure and instruction, and transportation and delivery.
  • The final regulations, issued days before the April 15 tax filing deadline, aim to clarify for accountants and tax preparers the industries and occupations covered by the "no tax on tips" provision in the One Big Beautiful Bill Act, passed in July 2025.
  • Industries and businesses that must report qualified tips for employees and contract workers to claim the deduction on federal tax returns include: restaurants, hotels, casinos, entertainment venues, cleaning companies, home repair and service companies, nail salons, hair salons, and spas, golf courses, taxi and rideshare companies, and gas stations.

Deep Dive

The "no tax on tips" provision in the One Big Beautiful Bill Act aims to provide tax relief for workers—fulfilling a campaign promise by President Donald Trump. But the law also creates complex challenges for tax preparers, employers, and employees, who must determine which tips qualify for the tax deduction.

The new provision has given rise to one of the most significant wage reporting changes in over a decade, Tom O'Saben, director of tax content and government relations at the National Association of Tax Professionals, previously told CFO Dive.

The IRS finalized the new rule after a public hearing and comment period, aiming to provide clear guidance on defining qualified tips. According to the IRS, workers can claim deductions on tips received in cash or other payment methods, such as checks, credit cards, debit cards, gift cards, or mobile payment apps, while working in certain qualified occupations. These occupations include:

  • Beverage and Food Service Workers—Restaurant and bar employees, such as servers, bartenders, cooks, line cooks, food preparers, dishwashers, fast-food counter workers, bakers, and hosts.
  • Entertainment and Events—Casino dealers, cashiers, casino cage workers, dancers, musicians, DJs, and performers, digital content creators, ushers, and locker room attendants.
  • Hotel and Guest Services—Bellhops, concierges, hotel and motel front desk staff, and room service attendants.
  • Household Services—Repair and maintenance workers, landscapers, electricians, plumbers, HVAC technicians, cleaners, locksmiths, and roadside assistance personnel.
  • Personal Services—Private event planners, photographers, videographers, and officiants; animal caretakers, tutors, nannies, and babysitters; visual artists and floral designers.
  • Personal Appearance and Wellness—Skincare specialists, massage therapists, hairstylists, barbers, and cosmetologists, shampooers, nail technicians, and pedicurists, brow and lash technicians, makeup artists, fitness trainers, and instructors, tattoo artists, and piercers, tailors, and shoe and leather repair workers.
  • Leisure and Instruction—Golf caddies, self-improvement course instructors, leisure and sightseeing pilots, tour guides, and travel leaders, sports and recreation instructors.
  • Transportation and Delivery—Parking and valet attendants, taxi and rideshare drivers, and chauffeurs, shuttle drivers, delivery drivers, personal vehicle and equipment cleaners, private and charter bus drivers, water taxi and charter boat drivers, and crew members, horse carriage drivers, movers, and gas station attendants.

The IRS noted that workers must receive tips directly from customers or through mandatory or voluntary tip-sharing arrangements, such as tip pools, and tips must be voluntarily paid by customers. Service charges are not considered qualified tips unless the customer has the option to disregard or modify the charge.

Employers must report qualified tips on Forms W-2, 1099-NEC, 1099-MISC, and 1099-K. Workers can also report qualified tips using Form 4137. However, the law limits the deduction for self-employed individuals, with a qualified deduction cap of $25,000 per year for tax years 2025 through 2028, based on their net earnings.

The IRS previously stated that there would be no changes to Form W-2 for the 2025 tax year, giving the agency, businesses, and tax professionals time to implement adjustments. Meanwhile, the IRS is providing penalty relief this year for employers in providing correct information on qualified tips.