Treasury Publishes Final Rules Listing Occupations that Qualify for No Tax on Tips Deduction and Provides Additional Guidance on Qualified Tips

Background

Congress passed the “No Tax on Tips” deduction for qualified tips as part of the One, Big Beautiful Bill, signed into law on July 4, 2025, and directed Treasury to publish a list of occupations that qualify to deduct tips because they customarily and regularly received tips as of Dec.  31, 2024. The IRS and Treasury have now issued final regulations titled “Occupations that Customarily and Regularly Received Tips; Definition of Qualified Tips.” The finalized regulations clarify the definition of “qualified tips,” and include the list of occupations with corresponding TTOCs which employers must report on 2026 Forms W-2 and other applicable tax forms.  The final regulations also explain how the deduction works in today’s tipping environment, including Point of Sale (POS) prompts and app-based tipping.

The Final Regulations

Definition of qualified tips

To be a qualified tip, the tip must be voluntarily received by a worker in an occupation included in the Listed Occupations. The final regulations follow the proposed regulations in further clarifying that qualified tips must satisfy certain requirements:

• Qualified tips must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash, or another form of electronic settlement or mobile payment application denominated in cash. Notably, digital assets, including crypto currency, are not included in this definition; however, the final regulations indicate that should there be additional guidance changing the tax treatment of digital assets, the final regulation may be updated accordingly.
• Qualified tips must be received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.
• Qualified tips must be paid voluntarily by the customer and not be subject to negotiation. Qualified tips do not include service charges unless the customer has an option to disregard or modify the service charge. 
  
  Example: In the case of a restaurant that imposes an automatic 18% service charge for large parties and distributes that amount to waiters, bussers and kitchen staff, if the charge is added with no option for the customer to disregard or modify it, the amounts distributed to the workers from this service charge are not qualified tips.   
  
  Example: A handheld POS device suggests three different tip amounts (15%, 18% and 20%) but does not allow a “no tip” option or moving a slider to zero. If the customer selects 15%, none of the amounts received are qualified tips, as the customer did not have the option to select zero tip, thus the amount received was not voluntarily received. However, if the customer selects an amount greater than the minimum option, the amount greater than the minimum amount was voluntarily provided and may be a qualified tip. In this example – if the customer selected 18%, then the amount voluntarily provided would be the 3% in excess of the required 15% charge.
• Importantly, workers can take the deduction only for qualified tips that are included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported by the worker on Form 4137. Gig workers and other self-employed individuals can qualify for this deduction if their occupation is included in the Listed Occupations and the other statutory and regulatory requirements are met.

Tip pools and management

The final regulations indicate that amounts received by a manager or supervisor through a voluntary or mandatory tip-sharing arrangement such as a tip pool are not qualified tips. However, amounts received directly by a supervisor or manager for services they provided in the course of duties performed in an occupation included in the Listed Occupations are qualified tips if all other requirements are met.

Anti-abuse safeguards stop wage reclassification, with strict presumptions in certain payor relationships

The final regulations replace a blanket ban with a facts-and-circumstances test to stop wages or other payments from being reclassified as “tips” just to claim the deduction. Two bright-line rules still apply in specific relationships, ensuring certain payments can never be treated as qualified tips.

Automatic Disqualifications:

• Employer as payor: If the employer is the payor of the amount labeled a “tip,” it is conclusively treated as recharacterized compensation and not a qualified tip.
• Direct ownership interest: If the tip recipient has a direct ownership interest in the payor, the amount is conclusively treated as recharacterized and not a qualified tip.
  
  

Warning Signs of Abuse

The final regulations further provide facts and circumstances that may indicate an impermissible recharacterization of wages, payment for services, or other income as tips include:

• A charge for services provided in an invoice is less than the payment from the payor shown on a related receipt or information return, and the cash tip reported on the receipt or information return is in an amount that approximates the difference between the charge amount on the invoice and payment amount on the receipt or information return.
• A significant shift in historical tipping or payment practices between the payor and the tip recipient.

Which occupations qualify as those that “customarily and regularly receive tips?”

The listed occupations are classified by the Treasury Tipped Occupation Code system, comprising a three-digit code and description for each of the occupations listed within the final regulations. As in the proposed regulations, the final regulations group the occupations into eight categories:

• 100s – Beverage and Food Service
• 200s – Entertainment and Events
• 300s – Hospitality and Guest Services
• 400s – Home Services
• 500s – Personal Services
• 600s – Personal Appearance and Wellness
• 700s – Recreation and Instruction
• 800s – Transportation and Delivery

The final regulations retain all occupations from the proposed list and add three new ones: “Visual Artists” (TTOC 509), “Floral Designers” (TTOC 510), and “Gas Pump Attendant” (TTOC 810). Three existing categories were renamed: “Food Servers, Non-restaurant” became “Food and Beverage Servers, Non-restaurant”; “Pet Caretaker” became “Pet and Show Animal Caretaker”; and “Eyebrow Threading and Waxing Technicians” became “Eyebrow and Eyelash Technicians” (TTOC 606) to include eyelash services.

Several existing categories were expanded. The regulations clarify that residential building doormen qualify as “Baggage Porters and Bellhops” (TTOC 301) or “Concierges” (TTOC 302), and that residential building maintenance workers (such as superintendents) qualify under “Home Maintenance and Repair Workers” (TTOC 401).

The examples for “Goods Delivery People” (TTOC 804) now include “app/platform-based delivery person” to cover app-based delivery workers.

The examples for “Digital Content Creators” (TTOC 209) now distinguish between two types of payments: (1) payments for access to content, which are compensation (not tips), and (2) voluntary payments made after accessing content, which can be considered qualified tips. The regulations also clarify that amounts retained by host platforms are not qualified tips.

Review the table titled “Occupations that Customarily and Regularly Received Tips on or Before December 31” in the final regulations for the complete list of occupations and examples.  

FLSA tip credit rules do not change.

The final regulations have no impact on determining what amounts count toward tip credit eligibility and do not control who is a “tipped employee” under the Fair Labor Standards Act or similar state and local laws.

Next Steps

·      Review the final regulations for complete details.

·      If you have not already done so, start identifying each impacted worker’s listed occupation now for future reporting with TTOCs.  Importantly, workers can take the deduction only for qualified tips that are included on Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K, or reported by the worker on Form 4137.  **Note:  New TTOCs will be available soon.

·      Review tip sharing policies. Amounts received by a manager or supervisor through a voluntary or mandatory tip-sharing arrangement such as a tip pool are not qualified tips.

·      The new regulations do not change existing requirements under wage and hour laws governing tipped employees.  Continue to follow federal, state and local wage and hour laws governing tipped employees.

·      If you have complex tip pools or platform-based operations, consider consulting with legal counsel to assess your tax, payroll, and wage and hour compliance requirements.