New Guidance Issued on OBBBA No Tax on Tips Provision

The One Big Beautiful Bill Act (OBBBA) was signed into law by President Trump on July 4, 2025. The administration’s featured legislation includes dozens of tax provisions impacting individuals, families, businesses, estates, international companies, and workers. Several changes addressed expiring provisions from the Tax Cuts and Jobs Act of 2017, passed during President’s first administration. Examples include making 100% bonus depreciation, the Section 199a deduction, business interest deduction, and the standard deduction permanent. It also called for new programs such as the introduction to Trump accounts, above the line charitable deductions, and new deductions for tip and over time income. The combination of these provisions spells tax savings for many.

Before taxpayers can take advantage of the new provisions, such as the deduction on tip income, additional guidance is needed from the IRS. These details provide specific information on claiming the deduction. Recently, the Department of Treasury released Proposed Regulation §1.224-1 clarifying the rules for the tip deduction.  To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.

What is the No Tax on Tips Deduction?

It is a new federal income tax deduction available to employees, and self-employed individuals which permits the deduction of qualified tips. These are voluntary or charged tips received from customers, or in certain cases, through an establishments tip sharing arrangement. The maximum annual deduction amount is $25,000, for self employed workers the deduction may not exceed net income from the business where the tips were earned. The deduction phases out for taxpayers with adjusted gross income over $150,000 or $300,000 for married filing jointly. It is important to note the deduction is only temporary phasing out in 2028.

Clarifications from the Proposed Regulation

The regulation clarified several details of the deduction

• Cash Tips – Includes tips received from customers that are paid in cash, check, credit card, debit card, gift card, tangible or intangible tokens that are exchangeable for a fixed amount of cash, and any other form of electronic settlement or mobile payment application that is denominated in cash. Not surprisingly, this is a very broad definition of cash. However, it excludes items paid in any other medium such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash. The proposed regulation notes that tips paid in most digital currencies are not considered cash tips because they are not exchangeable for a fixed amount in cash.
• Paid by Customers – Payments to employees under a mandatory or voluntary tip-sharing arrangement, such as a tip pool, are specifically treated as eligible for the deduction provided that they meet the other qualifications for the deduction.
• Payments Must be Voluntary – The proposed regulation confirms that service charges, automatic gratuities, and other mandatory amounts automatically added to a customer’s bill by the vendor or establishment, are not qualified tips. However, it does provide an important exception for when the customer is expressly provided an option to disregard or modify the gratuity without consequence. Thus, businesses can still automatically add tip amounts to bills as long as they make it clear that the customer is still free to change or disregard the additional charge.
• Married Taxpayers – Married taxpayers must file a joint return in order to claim the deduction. The deduction is not available for taxpayers filing on a married separate basis.
• Occupations – Only individuals in occupations listed by the IRS are eligible for the deduction (See Table A). Furthermore, individuals who are employees or self-employed in a specified service trade or business are not eligible for the tip deduction. A specified service trade or business is any business subject to the special limitations under the 199A qualified business income deduction.

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It is important for businesses that employ individuals who receive tip income to become familiar with these rules. In addition, businesses with mandatory tip policies should re-examine those policies to consider modifying them to allow their employees to take the deduction on their tips.. If you have questions about the information outlined above or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.