On September 19, 2025, the IRS published proposed regulations to implement and provide guidance regarding new Section 224, enacted as part of the One Big Beautiful Bill Act (P.L. 119-21). The proposed regulations define qualifying payment methods, jobs that customarily receive tips, and exclusions from the deduction.
Section 224 would allow single filers who earn up to $150,000 annually or married couples who earn up to $300,000, to deduct up to $25,000 in qualified tips received during the tax year in an occupation that customarily and regularly received tips on or before December 31, 2024. The deduction phases out for taxpayers with modified adjusted gross income over $150,000, and over $300,000 for joint filers. The proposed regulations clarify that the maximum deduction is reduced (but now below zero) by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds the $150,000 (or $300,000) limit. To be deductible, tips must be included on reporting statements, such as the Form W-2 or Form 1099. No deduction is allowed under section 224 for any year beginning after December 31, 2028.
As with the statute, the proposed regulations define a qualified tip as one “received from customers or, in the case of an employee, through mandatory or voluntary tip-sharing arrangement, such as a tip pool.” The tip must be a cash tip, which is one paid by a cash medium of exchange. The proposed regulations identify examples of cash exchanges, including a check, a credit or debit card, a gift card, table or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), or any other form of electronic or mobile payment that is denominated in cash. The proposed regulations also list 68 job titles that “customarily and regularly receive[] tips,” and so would qualify for the deduction. This list is identical to the list included in draft guidance released earlier this month.
Consistent with both the statute and a half-century of IRS guidance, qualified tips must be given voluntarily, and the amount must be determined by the payor. The proposed regulations also provide that tips should be in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for services. Any mandatory payments, like service charges and automatic gratuities, that are added to a customer’s bill by the vendor or establishment are not qualified tips, unless the customer is expressly provided the ability to modify or disregard it without consequence.
The proposed regulations provide several examples that attempt to illustrate when a tip is given voluntarily, particularly in the restaurant context. For example, an automatic 18% charge added for parties of six or more, with no option to modify or disregard the charge, is not a qualified tip, and so is not deductible, but any additional amount provided above that automatic charge would be considered a qualified tip. In contrast, an amount included on a bill that includes a recommended tip of 18% for parties of six or more, with a line that allows the customer to subtract or add to the amount, would be a qualified tip. If a bill is presented on an electronic device, and includes several options for tip, including a “no tip” option, any tip amount the customer selects would be a qualified tip. However, if the customer must select a tip amount greater than zero on the device, with no option to choose “no tip,” the lowest tip amount available would not be a qualified tip, while any amount given above that lowest amount would be a qualified tip. For example, if the options were 15%, 18%, or 20%, and the customer chose 18%, 15% would not be deductible as a qualified tip, but the additional 3% would qualify.
While these examples helpfully define the outer boundaries of when a tip is truly “voluntary” as required for a qualified tip, it remains somewhat unclear what is sufficient to “expressly” provide a customer with the “option to disregard or modify” a tip amount. For electronic payments, for example, is it not clear whether the IRS would consider including “other” as an option and allowing the customer to input $0.00 on a secondary screen is permissible or whether language on a paper bill that indicates that the gratuity is “recommended” or “suggested” with an option to request it be removed is sufficient.
Tips received in the course of a specified service trade or business, as defined in section 199A(d)(2), are not qualified tips. The proposed regulations provide two examples to illustrate this point: Tips paid by audience members to a self-employed comedian are not qualified tips because the tips are received in the course of the comedian’s specified service trade or business of the performing arts. In contrast, tips paid by guests of a hotel to a pianist employed in the hotel are qualified tips because the pianist is performing services as an employee, and the pianist’s employer—the hotel—is not in a specified service trade or business. (In contrast, were the pianist self-employed, the pianist would, like the comedian, presumably not be eligible for the deduction.) In these examples, the deductibility of the tips turns on the recipient’s status as an employee, which seems an odd result that, although rooted in the statutory language, could lead to confusion and seem unfair to some taxpayers.
It is also unclear whether and how some self-employed individuals who ordinarily receive tips will qualify for the deduction. As noted above, the statute requires that tips be included on information reporting statements to be deductible. However, in practice, many individuals in ordinarily tipped occupations may not receive a Form 1099 or that reports their tipped income. Take, for example, a self-employed esthetician or massage therapist who does in-home appointments. Because these individuals will not generally receive a Form 1099-NEC for their services, any tips they receive in cash or through an electronic payment method that does not qualify as a third-party payment network required to issue Forms 1099-K will not be reported on an information return. (Although the authors acknowledge that some of these tips may go unreported on tax returns entirely, it seems probable that at least some portion of them are reported in an effort to document sufficient income for purposes of qualifying to rent apartments, buy homes, or finance purchases.) Again, this gap is a result of the statutory scheme, but the regulation makes no attempt to address it.
Additionally, a payment is not a qualified tip if the recipient has an ownership interest in or is employed by the payor of the tip. This would seem to exclude any tips paid by employers to employees. These rules were included as anti-abuse measures. Further clarification could be helpful. In particular, it would be beneficial if the final regulations clarified that shareholders and partners are not considered to employ employees of the corporation or partnership in which they own shares or are partners. To the extent the IRS believes that such a rule could be abused, perhaps a minimum ownership interest should be required before the rule applies.
Finally, any tips received through illegal, pornographic, or prostitution activities are not deductible, even if they otherwise meet the criteria. However, the proposed regulation does not define “pornographic” activity, which may lead to unconstitutional, or at least confusing, results. For example, while digital content creators may deduct qualified tips under these proposed rules, content creators whose content is considered pornographic would be ineligible for the deduction. In other words, assuming all other criteria are met, the deductibility of tips for content creators depends entirely on the type of content created. Denying a tax deduction on this basis may run afoul of the First Amendment, as a content-based speech restriction and “disturbing use of selective taxation.” Arkansas Writers Project Inc. v. Ragland, 481 U.S. 221, 229 (1987). See also, Leathers v. Medlock, 499 U.S. 439, 446-453 (1991) (a “tax scheme that targets a small number of speakers” creates “the danger of censorship”); Hannegan v. Esquire, Inc., 327 U.S. 146 (1946) (discrimination in mail subsidies between sexual oriented magazines and other types of magazines based on its artistic value violates the First Amendment).
The IRS has requested public comments on the proposed regulations, which must be received by October 22, 2025. The public hearing will be held on October 23, 2025.