IRS Issues Final Rules for "No Tax on Tips" under OBBBA
The IRS released final rules about a new provision called “no tax on tips” (part of the One Big Beautiful Bill Act). The new rules are effective June 12, 2026 and are applicable for tax years 2025-2028.
Background on “No Tax on Tips”
People who earn tips (like servers, bartenders, etc.) may be able to deduct their tips from their federal income taxes—so they don’t pay income tax on that money. This is a tax deduction, not a change to payroll. The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.
The OBBBA added IRC §224, which:
- Defines the income tax deduction for qualified tips.
- Clarifies who qualifies and what counts as qualified tips
Definitions
Tips
The final regulations define tips as “amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm’s-length transaction.”
Cash Tips
Cash Tips must be paid in a cash medium of exchange, such as cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), or another form of electronic settlement or mobile payment application denominated in cash.
- Cash tips include foreign currency.
- Cash tips would not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets).
- Include tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under tip-sharing arrangements.
To claim the tax deduction, the tips must meet BOTH of the following conditions:
- The tips must be earned from a job listed as a qualifying occupation.
The occupations of tipped workers are categorized by a Treasury Tipped Occupation Code (TTOC). The main categories remain the same, but the final regulations add visual artists, floral designers, and gas pump attendants.
The list of Occupations That Customarily and Regularly Received Tips is included in the Federal Register on table A.
- The tips must be "qualified"
To be a qualified tip, the tip must be received by a worker in an occupation on the List of Occupations that Receive Tips. Furthermore, qualified tips may only include amounts that:
- 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.
- 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.
Employer Reporting
Employers are required to report qualified tips on an employee’s Form W-2, Wage and Tax Statement, in Box 12 with Code TP (or where applicable on certain Forms 1099). For the Form W-2, Box 14b will be used to report up to two TTOCs for an employee’s tipped occupation. The codes will be used to determine whether the employee is in an occupation eligible for the deduction for qualified tips.
The Quick Info for Your Employees
Simple Summary – If you earn tips in a qualifying job, you may be able to pay less federal income tax, but you have to claim it yourself when filing taxes, and not all jobs or tips qualify.
- It’s not automatic. Employers still take out taxes like normal. Applicable employees claim the benefit later when they file taxes and the information should be on your W-2.
- Only certain jobs qualify. The IRS created an official list of jobs that regularly receive tips.
- What counts as “tips”? Cash or card tips from customers or tips shared with you (like tip pools).
- Timeframe: This applies to tax years 2025 through 2028.