IRS finalizes deduction rules for tips, adds 3 eligible jobs

The IRS issued final regulations for the new tips deduction (T.D. 10044) under H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act, adding three eligible jobs, defining qualified tips, and clarifying some areas.

With the three new occupations — floral designers, visual artists, and gas pump attendants — the number of jobs eligible for the deduction is 71.

The IRS issued an initial list of jobs in September, then posted proposed regulations later that month. It issued further guidance in November before posting the final regulations Friday, days before the April 15 tax filing deadline.

On defining qualified tips, one parameter clarified in the final regulations is that no digital assets are included as cash tips. However, the IRS said it will “consider the tax treatment of payment stablecoins in connection with implementation of the GENIUS Act, including whether these final regulations should be revised if payment stablecoins are treated as cash or cash equivalents for other U.S. federal income tax purposes.”

The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, P.L. 119-27, creates a comprehensive federal regulatory framework for payment stablecoins.

Mandatory amounts added to a customer’s bill, such as an automatic 18% gratuity for a large party, do not count as qualified tips, the IRS said. However, any amount over the 18% is a qualified tip, the final regulations said. And when a customer can change a recommended amount or choose a percentage to tip, including zero, then those amounts count as qualified tips.

The IRS received more than 300 comments on the proposed regulations, some of which led to clarifications. For example, one commenter asked that a winery tasting room server be added to the list of occupations that receive tips. The list already included “food servers, non-restaurant,” which covers a winery tasting room server. The final regulations changed the category to “food and beverage servers, non-restaurant.”

Under H.R. 1, the maximum annual deduction is $25,000 for tipped workers. The deduction phases out for taxpayers with modified adjusted gross income (AGI) over $150,000 ($300,000 for joint filers).

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.