On April 10, the IRS released final regulations to implement and provide guidance regarding new Section 224, enacted as part of the One Big Beautiful Bill Act (P.L. 119-21). Section 224 allows 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. (See prior coverage.) No deduction is allowed under section 224 for any year beginning after December 31, 2028. The final regulations made several, generally minor, changes to the proposed regulations based on feedback the IRS received during the comment process. The final regulations list 71 job titles that “customarily and regularly receive[] tips,” and so would qualify for the deduction. This list adds three additional job titles to the proposed regulation’s list of 68: floral designers, visual artists, and gas pump attendants.
The final regulations also provide additional guidance on the requirement that tips be reported, further clarification on the definition of cash tips, specific guidance for certain eligible and ineligible occupations and activities, continued relief from the specified service trade or business exclusion, and new anti-abuse rules.
Requirement That Tips Be Reported
As set forth in the statute, to be deductible, tips generally must be included on information returns, such as the Form W-2 or Form 1099. The final regulations do not change this requirement, but clarify that, for independent contractors or other gig workers, no deduction is permitted unless the income is reported on a reporting statement or separately reported by the individual as tip income on Form 4137 (or successor). The final regulations do clarify that tips reported to a disregarded entity may be deducted by the individual who owns the entity on the individual’s return. Conversely, the final regulations clarify that tips paid to a partner that are reported on an information return issued to a partnership are not deductible by the partner.
Cash Tip Definition
The 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 final regulations provide that amounts received by managerial employees through a tip pool are not qualified tips, but tips directly paid to them are so long as the tip otherwise satisfies the requirements of section 224. The tip must be a cash tip, which is one paid by a cash medium of exchange. The proposed regulations identified examples of cash exchange, which include a check, credit or debit card, gift card, tangible 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 application that is denominated in cash. The final regulations retain these examples and clarify that tips paid in foreign currency are cash tips for purposes of these rules. Conversely, the final regulations clarify that tips paid in a digital assets as defined under section 6045, such as bitcoin are not cash tips. In light of the passage of the GENIUS Act, the preamble indicates that if stablecoins are treated as cash or cash equivalents, Treasury will consider whether they may be treated as cash tips.
Qualified tips must be given voluntarily, and the amount must be determined by the payor. As in the proposed regulations, the final regulations provide that automatic gratuities, including service charges, that are not subject to a customer’s full discretion are not qualified tips for purposes of the deduction. Treasury rejected commenter’s suggestion that because customers can choose not to patronize a restaurant that imposes a service charge that the payment should be considered voluntary. Consistent with the proposed regulations and longstanding IRS guidance, if a customer is expressly provided an option to disregard or modify amounts added to a bill, such amounts are considered voluntary. The final regulations clarify that the amount is only voluntary to the extent that the customer may reduce the charge. Thus, for the full charge to be a qualified tip, the customer must have the option to reduce the tip amount to zero. The final regulations clarify that “tip selection methods such as POS systems with a tip slider that goes to zero or an option for the customer to select “other” and input zero are voluntary.” This provides certainty for many restaurants whose pay-at-the-table POS systems did not operate in the manner described in the proposed regulations. As in the proposed regulations, any amount provided on top of an automatic gratuity/service charge that does not meet the voluntariness requirement is a qualified tip, so long as it meets the other criteria.
Additional Clarity for Digital Content Creators
The final regulations clarify that a payment to a digital content creator is a qualified tip only if the customer makes the payment voluntarily to the creator after already having access to their content, and the customer determines the amount of the tip. Payments to creators that enable customers to gain access to the creator’s content are compensation for services provided, not tips. For purposes of the deduction, a digital content creator’s tip excludes any amount that was kept by the content platform. Importantly, the final regulations clarify that notional rewards provided by many content platforms in exchange for tips—such as highlighting comments, recognition, or other digital rewards with no meaningful value—retain their character as tips for purposes of the deduction.
Exclusion for Pornographic and Illegal Activities
Finally, the final regulations adopted the proposed regulation’s position that amounts received through illegal, pornographic, or prostitution activities are not deductible, even if they otherwise meet the criteria. The preamble acknowledges a comment that indicated that pornography may, in many cases, be protected first amendment speech, but made no changes to the final regulations in light of the potential constitutional concern. As noted in a previous post, the regulation does not define “pornographic” activity, which may also lead to uncertainty as to what types of activities fall within the scope of that prohibition, even assuming that it is constitutional. The final regulations did clarify that a worker in the cannabis industry may be eligible for the deduction if federal law changes to allow for legal marijuana transactions and those transactions are legal under state law. The final regulations indicate Treasury and the IRS will consider whether to provide additional guidance on these exclusions.
Continued Relief for Workers in a Specified Service Trade or Business
Under section 224, tips received in the course of a specified service trade or business, as defined in section 199A(d)(2), are not qualified tips. This is true even if the job in which the tip is received is otherwise eligible for the trip deduction because it is a position that “customarily and regularly received tips.” As noted in a previous blog post, this could create seemingly unfair to some taxpayers as the deductibility of the tips turns on the recipient’s status as an employee and the identity of the recipient’s employer, rather than on the underlying activity. However, under transition relief announced in Notice 2025-69, an occupation will not be considered a specified service trade or business if it is identified on the proposed eligible jobs list until January 1 of the year following the issuance of final regulations that addressed this exclusion. The final regulations on section 224 clarify that they do not address the exclusion and reserve the topic for future guidance. Therefore, the transitional relief remains in effect.
Anti-abuse Rules
Under the proposed regulations, a payment would not be a qualified tip if the tip recipient had an ownership interest in or was employed by the payor of the tip. The final regulations replace this limited anti-abuse rule with a more expansive facts and circumstances test. Under the final regulations, a payment is not a qualified tip if, based on all relevant facts and circumstances, the payment represents a recharacterization of wages or payments for services as tips for purposes of claiming the deduction. Facts that may indicate a recharacterization of payments include:
- A charge for services provided in an invoice that is less than the payment from the payor shown on a related receipt or information return and the reported amount of the cash tip approximates the difference between the charge amount on the invoice and payment amount on the receipt or information return; and
- A significant shift in historical tipping or payment practices between the payor and the tip recipient.
In other words, if the customer historically paid $30 for a service, and the service is now charged at $20, but the customer still pays $30 including a $10 tip, that is an indication that the service fee has been recharacterized as a tip.
However, the final regulations also adopt the proposed regulation’s anti-abuse rules. Therefore, in addition to the facts and circumstances test, there is also an irrebuttable presumption that the amount paid is a recharacterization of wages, payment for services, or other income as tips, and therefore cannot be a qualified tip, if:
- the employer of an employee is the payor of a cash tip received by the employee; or
- the tip recipient has a direct ownership interest in the payor of a cash tip.
The final regulations define ownership interest to mean ownership by vote or value of five percent or more of the stock in a corporation; ownership of five percent of the profits interest or capital interest in a partnership; or ownership of more than five percent of the beneficial interests in any other entity. The final regulations further clarify that an entity that acts merely as conduit to remit a tip initially paid by a customer, client, or service recipient to the tip recipient, is not a payor of the tip for purposes of the regulations.
Social Security Number Requirement
As with the statute, the regulations provide that taxpayers must include their Social Security Number (SSN) on their tax return to claim the deduction. Following commentary, the regulations further clarify that taxpayers with an Individual Taxpayer Identification Number (ITIN) rather than an SSN cannot claim the deduction consistent with the language of the statutes.
Effective Date
The final regulations will be effective as of June 12, 2026.