Tax breaks for tipped workers: qualifying for the new deduction

Article | September 25, 2025

Authored by Johnson & Sheldon, PLLC

The One, Big, Beautiful Bill Act (OBBBA) introduced significant tax changes in July 2025, including a new income tax deduction for qualified tips received by workers in eligible occupations. With the recent release of proposed regulations by the Treasury Department and IRS, taxpayers now have more guidance on what constitutes "qualified tips," which occupations are eligible, and how to claim this deduction starting with the 2025 tax year.

Understanding the “qualified tips” deduction

Although many people receive tips, not all tip income will qualify for the new deduction. In order to claim it, several conditions must be met.

Definition of “qualified tips”
All qualifying amounts must be paid voluntarily by customers in a “cash or equivalent” form. That includes checks, credit or debit card payments, gift cards, and electronic transfers (like certain mobile apps). Importantly, the IRS also recognizes that employees often share tips with coworkers who help deliver services (a waitstaff might pool or distribute tips among bussers, dishwashers, or other team members). Under these new rules, you can still deduct amounts you receive through mandatory or voluntary tip-sharing arrangements.

The most significant line the IRS draws here is between a voluntary tip and a mandatory service charge. If a restaurant automatically tacks an 18% “gratuity” onto large-party bills and there’s no customer choice in the matter, those amounts are viewed as non-tip wages or service charges, excluding them from this deduction. By contrast, if the menu suggests a certain gratuity but customers can freely change or remove it, that portion may qualify.

Occupation requirement
Even if your tips meet the above definition, you must also work in an occupation that customarily and regularly received tips before the end of 2024. The IRS released a list of nearly 70 qualifying occupations, ranging from beverage and food service staff (e.g., bartenders, waiters, bussers, hosts) to home service workers (electricians, landscapers) and beyond, so long as these roles typically depended significantly on direct customer tipping.

Specified Service Trade or Business (SSTB) limitation
There is an exception for those employed in a “specified service trade or business” (SSTB), such as many performing artists or consultants. Under existing tax law, amounts earned in SSTBs generally do not qualify for this new tip deduction. Therefore, a self-employed comedian cannot transform earnings from a show into “qualified tips.” By contrast, a piano player employed by a hotel (which is not an SSTB) can claim tips collected in the hotel lounge.

Additional requirements and exclusions
Several legal boundaries are in place to discourage misclassification. For instance, tips associated with criminal or illicit activity do not qualify. The same is true for tips received through an ownership stake in (or by being employed by) the customer who’s paying them, or for certain disallowed activities like prostitution or pornography. The overarching goal is to keep this benefit focused on legitimate service workers whose voluntary tips come from typical, lawful performance of their jobs.

Occupations that customarily and regularly received tips

The IRS organizes these “tipped occupations” into eight primary categories to give both employees and self-employed service providers a clearer idea of where their role fits.

Beverage and Food Service (100s)
This group spans wait staff, bartenders, restaurant hosts, food servers in nontraditional settings, bussers, and others who directly engage with diners, often pooling gratuities to recognize the entire front-of-house team.

Entertainment and Events (200s)
Roles in the entertainment industry can include casino dealers, DJs, and certain performers. Because performance arts may be an SSTB, however, self-employed performers typically aren’t eligible. Employees of non-SSTB employers, such as a hotel that hires a vocalist, may be in the clear if the vocalist’s occupation is listed.

Hospitality and Guest Services (300s)
Hotel workers, bellhops, concierges, even room attendants who join a tip pool, fall under this category. If you regularly receive tips while assisting customers in a lodging or hospitality setting, you may belong here.

Home Services (400s)
Sometimes overlooked in discussions of tipping, home repair contractors, landscapers, and locksmiths often receive unprompted tips. Under the OBBBA, these professions appear on the list so long as the money is freely given by the customer.

Personal Services (500s)
Babysitters, private event planners, photographers, and pet caretakers sometimes rely on discretionary payments from clients. If these tips are no more than contractual fees, they may qualify.

Personal Appearance and Wellness (600s)
This category includes hairdressers, massage therapists, nail technicians, makeup artists, and more. 

Recreation and Instruction (700s)
Golf caddies, sports instructors, tour guides; these jobs rely heavily on appreciative customers. If you consistently get cash tips, chances are the IRS has recognized your role.

Transportation and Delivery (800s)
Valet attendants, taxi and rideshare drivers, water taxi operators, and even some specialized charter drivers are firmly represented here. The key is regularly receiving something above the basic fee, given freely by riders.

Detailed requirements and constraints

Although the promise of “no tax on tips” might sound limitless, the statute and proposed regulations install specific guardrails.

$25,000 annual limit
This maximum refers to the total amount of qualified tips you can deduct in a single tax year. Whether you file single, married filing jointly, or otherwise, you cannot exceed $25,000. If you earn $40,000 in legitimate tips across your bartending or catering roles, only the first $25,000 can be deducted.

Phase-out based on Modified Adjusted Gross Income (MAGI)
The deduction begins to shrink once your MAGI surpasses $150,000 (or $300,000 for a married couple filing jointly). For every $1,000 of income above that ceiling, your deduction declines by $100. 

Joint filing requirement for married taxpayers
If you’re married, both spouses must file a joint return to claim the deduction. Otherwise, you forfeit this tax benefit. Married couples can include each spouse’s qualified tips, but together they remain bound by the same $25,000 yearly cap.

Self-employment and net income restrictions
For self-employed individuals (like an independent hairstylist working in a rented salon chair), the law instructs that you can only deduct tips if your net business income (excluding this tip deduction) is positive. You can’t use the deduction to turn a net loss into negative or deeper territory. Only net positive trade or business income supports this tax break.

SSN required
In order to claim the deduction, you must list your Social Security number on your tax return. An Individual Taxpayer Identification Number (ITIN) alone won’t unlock this benefit; you need an SSN. For joint filers, if each spouse is trying to deduct tips, both SSNs must appear.

Voluntary tip reporting agreements and compliance

The IRS has long encouraged workers to accurately report their tips through voluntary agreements such as the Tip Reporting Determination Agreement (TRDA) and the Gaming Industry Tip Compliance Agreement (GITCA). Under these programs, employers and the IRS establish agreed-upon tip rates, which employees then report. The primary advantage is tip audit protection, so participants aren’t usually subjected to extensive tip audits as long as they stick to these rates. Under the new rules, any tips reported via TRDA/GITCA are treated as “qualified tips” so long as all other requirements (occupation, voluntary payment, legality) are satisfied.

For employees in these programs who frequently earn tips in excess of the agreed-upon rate, the new rules clarify that reporting the overage on Form 4137 ensures it can still count toward the deduction. 

Practical examples and pitfalls

Many disputes arise from misunderstanding the difference between a service charge and a bona fide tip. The classic restaurant scenario is easiest to visualize: If the menu or staff truly “require” an extra 15% or 18% on your table’s bill, that’s not a tip, regardless of how it’s labeled. Compare that to a recommended gratuity with an option to adjust up or down. Only the portion that’s within the diner’s free choice is a qualified tip.

Another pitfall involves incorrectly logging or reclassifying contract payments as tips. Suppose a landscaper contracts a yard job for $5,000. The customer spontaneously pays $5,100 in gratitude for a job well done. The extra $100 is a genuine tip. The landscaper, however, can’t retroactively rewrite the contract as $4,500 plus $600 in tips - that extra $500 is not validated by the customer’s free choice. These scenarios illustrate how crucial it is to categorize items accurately instead of trying to force them into tip income.

Self-employed performing artists and consultants should also be aware of the Specified Service Trade or Business restrictions. A singer hired by a hotel that is not itself an SSTB might claim the deduction if the singer’s occupation is recognized on the IRS list and the singer is an employee. But a self-employed performer running their own theatrical or dance business doesn’t benefit because these rules exclude their entire trade as an SSTB.

Implementation considerations 

Although final regulations could refine minor details, it’s wise to be proactive.

Tax planning 
Keep tabs on your income: the $25,000 tip deduction cap, along with the phase-out threshold, means that you’ll need to watch year-to-date tips and adjusted gross income. If you’re close to crossing a phase-out threshold, it could make sense to evaluate your scheduling and how you structure year-end shifts or gigs.

Documentation 
Strong recordkeeping is crucial. If you’re not in a formal IRS voluntary tip agreement, creating a daily or weekly log of gratuities (and cross-referencing with any point-of-sale reports) helps ensure accurate tax filing. Should the IRS ever question your tip amounts, you’ll need to prove that those tips were genuine and voluntarily paid.

Erroneous classification concerns
Risks arise if an employer attempts to label certain wages as “tips” or if a self-employed worker tries to “tip-ify” standard invoices. The IRS is primed to scrutinize abuse of this deduction, so it's not worth the risk. Only classify truly discretionary amounts as tips; anything else could trigger costly audits and penalties. When in doubt, review the official guidelines or reach out to a tax professional for advice.

Next steps

With the OBBBA’s changes going into effect for 2025 tax filings, it pays to get organized now: Fine-tune your tip tracking, confirm that your occupation appears in the IRS’s published list, and determine where you stand relative to the $25,000 cap and income phase-out thresholds.

As with any new (and complex) law, the details can evolve, so keep an eye out for final IRS regulations providing additional clarity. In the meantime, consider consulting a qualified tax advisor to walk through the specifics of your situation. The better you prepare, the more likely you’ll be to enjoy the full benefit of these provisions when filings open for 2025.