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IRS Finalizes “No Tax on Tips” Regulations

Western CPE Staff

The IRS and Treasury released final regulations (T.D. 10044) on April 10, 2026 — just days before the April 15 filing deadline — implementing the “No Tax on Tips” provision under §224 of the Internal Revenue Code, enacted by the One, Big, Beautiful Bill Act (OBBBA). These regulations are effective June 12, 2026, but apply to tax years beginning after December 31, 2024, which means they govern the 2025 returns. Here’s a breakdown of some of the final regulations:

Three New Occupations Join the List

The final regulations add three occupations to the Treasury Tipped Occupation Code (TTOC) system, bringing the total to 71:

Floral Designers (TTOC 510) — including event florists, previously grouped under “Private Event Planners”
Visual Artists (TTOC 509) — covering workers such as ice sculptors and caricature sketch artists
Gas Pump Attendants (TTOC 810) — added after IRS reviewed data from New Jersey and Oregon, the two states that prohibit self-service

The Treasury also refined several existing categories. App and platform-based delivery drivers are now listed under “Goods Delivery People” and “Taxi and Rideshare Drivers and Chauffeurs.” Workers classified as “Wait Staff” now include banquet staff and catered events. The list remains exhaustive — if an occupation did not customarily receive tips on or before December 31, 2024, it is not eligible.

Tightened Definition of “Qualified Tips”

The final regulations address several gray areas that practitioners flagged during the comment period:

Foreign currency counts; digital assets do not. The Treasury left the door open to revisiting digital asset treatment if stablecoins are later treated as cash equivalents under the GENIUS Act.
Voluntary tips only. Automatic gratuities and mandatory service charges still do not qualify. However, any amount a customer voluntarily pays above an auto-gratuity can qualify, and a tip only counts as “voluntary” if the customer has the option to reduce it to zero.
Digital content creators. Payments made to access a creator’s content are compensation, not tips.

Stronger Anti-Abuse Rules

The Treasury added an irrebuttable presumption that an amount is a recharacterization of wages — and therefore not a qualified tip — in two situations:

The employer of an employee is the payor of the tip, or
The tip recipient has a direct ownership interest in the payor.

A facts-and-circumstances test applies to determine whether amounts represent disguised wages or service payments reclassified as tips to capture the deduction.

Other Clarifications

The $25,000 deduction cap applies regardless of filing status, and the MAGI phaseout is applied after the $25,000 limit — not before.
SSN requirement: The taxpayer must be issued a valid SSN before the due date of the return (including extensions), and ITIN holders cannot claim the deduction. For married taxpayers filing jointly, the SSN of the spouse who earned the qualified tips must appear on the return; if both spouses earned qualified tips, both SSNs are required.
Supervisors and managers may claim the deduction for tips received while personally performing services in a listed occupation.
Partners cannot claim the deduction because required information returns are issued to the partnership, not the individual partner.
GITCA/TRDA participants may claim the deduction based on their designated tip rates reported on Form W-2.

Some Questions Remain

One issue we flagged during filing season was not resolved. The final regulations confirm that, for a sole proprietor, Schedule C expenses reduce gross income for purposes of the §224(c) net income limitation. However, the Treasury explicitly declined to address whether the deductible half of SE tax, the self-employed health insurance deduction, and contributions to self-employed retirement plans are “allocable” to the trade or business for this purpose. The final regulations leave this interpretive question unresolved.

Reliance and Effective Date

Taxpayers may rely on the September 2025 proposed regulations for tax years beginning after December 31, 2024, and on or before publication of the final rule, provided the proposed regulations are applied in their entirety and in a consistent manner. For returns going forward, the final regulations apply. The Treasury has also indicated that additional guidance on information reporting and claiming the deduction in subsequent years will be provided through future form instructions.

For more on “No Tax on Tips” provisions be sure to check out our eTax Alert “IRS Updates Tip Deduction Instructions Mid-Season” and read the Treasury’s final regulations (T.D. 10044).