Wait staff receiving “voluntary” tips from customers can use the No-Tax-on-Tips deduction under a new federal law, but not if the business has automatically added the gratuity as a service charge on the bill, as often occurs for a large table of diners, the IRS said Friday.
This is just one tidbit contained in proposed IRS rules identifying 70 occupations where workers customarily receive tips and clarifying the circumstances under which employees can claim a tax deduction for those tips under the recently enacted One Big Beautiful Bill Act (OBBBA).
The proposed rules will be published in the Federal Register on Sept. 22 and subject to a public hearing on Oct. 23.
Under OBBBA, certain tipped workers can deduct up to $25,000 in qualified tip income for tax years 2025 through 2028. The deduction is available to both employees and self-employed workers, though for self-employed taxpayers the deduction cannot exceed their net income. The deduction phases out for taxpayers with modified adjusted gross income over $150,000.
To claim the deduction, a worker must both be employed in an occupation on the IRS list and receive “qualified tips” under the following scenarios:
- Tips must be paid in cash, or by check, credit card, debit card, gift card or another form of electronic settlement or mobile payment application.
- Tips must be received directly from customers or distributed through a tip-sharing arrangement such as a tip pool.
- Tips must be paid voluntarily by customers, not be subject to negotiation, and not include some service charges. For example, tips are deemed ineligible for the tax deduction if a restaurant imposes an automatic 18% service charge for large parties and distributes that to waiters, bussers, kitchen staff, or if the charge is added with no option for the customer to disregard it or modify it.
- Any amount received for illegal activity, such as prostitution or pornographic activity, is not a qualified tip.
The Treasury Tipped Occupation Code provides a three-digit code and descriptions for the occupations listed within the proposed regulations. The occupations are grouped 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
