Explanation of Provisions

1. Qualified tips

Section 224(d)(1) defines “qualified tips” as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. Consistent with section 224(d), the proposed regulations would define “qualified tips” as amounts received as cash tips by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, subject to certain limitations. The proposed regulations would define cash tips as tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are paid in a cash medium of exchange, including by 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), and any other form of electronic settlement or mobile payment application that is denominated in cash. Cash tips would not include items paid in any medium other than cash or charge, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets). For purposes of these proposed regulations, tips would be 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. These definitions are consistent with IRS guidance defining tips for FICA and income tax withholding purposes in §§ 31.3121(a)(12)-1 and 31.3401(a)(16)-1, as well as other IRS guidance concerning tips in Notice 2023-13, 2023-9 I.R.B. 534, and Rev. Rul. 2012-18, 2012-26 I.R.B. 1032.

A. Payments must be voluntary

Section 224(d)(2)(A) provides that “qualified tips” must be paid voluntarily without any consequence in the event of nonpayment, must not be the subject of negotiation, and must be determined by the payor. In Revenue Ruling 2012-18, the IRS applied similar factors in distinguishing tips from non-tip wages, specifically service charges, for FICA and income tax withholding purposes. Revenue Ruling 2012-18 provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion, (2) the customer must have the unrestricted right to determine the amount, (3) the payment should not be the subject of negotiation or dictated by employer policy, and (4) generally, the customer has the right to determine who receives the payment. See also Ann. 2012-25, 2012-26 I.R.B. 1058; Rev. Rul. 59-252, 1059-2 C.B. 215. Example A in Revenue Ruling 2012-18 concludes that an 18% charge automatically added to a bill for a large party is a service charge and not a tip because it was dictated by the employer and was not paid free from compulsion. Consistent with both existing IRS guidance on tips and evolving practices concerning service charges, the proposed regulations would clarify that service charges, automatic gratuities, and other mandatory amounts automatically added to a customer’s bill by the vendor or establishment, are not qualified tips for purposes of section 224(d) unless the customer is expressly provided an option to disregard or modify it without consequence.

B. Special rules regarding a specified service trade or business

Section 224(d)(2)(B) provides that qualified tips do not include those received in the course of a trade or business that is a specified service trade or business (SSTB) as defined in section 199A(d)(2). Under section 199A(d)(2), an SSTB is defined as any trade or business (A) involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or (B) that involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)). 3 Treasury regulations in § 1.199A-5(b)(2) further define what it means to perform services in the fields listed in section 199A(d)(2)(A). For example, § 1.199A-5(b)(2)(vi) provides, in part, that the meaning of services performed in the performing arts means “the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.” The regulations further provide that, ‘[t]he performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts. . . . [or the] provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.” The proposed regulations would provide that an amount received by an individual in the course of an SSTB (as defined in section 199A(d)(2) and § 1.199A-5(b)) is not a qualified tip. The Treasury Department and the IRS request comments on the application of the existing rules under § 1.199A-5(b) to the SSTB definition in section 224. Specifically, comments are requested concerning whether the definitions in §1.199A-5(b) should be refined for section 224 purposes.

Consistent with the flush language in section 224(d)(2), the proposed regulations would also provide that tips received by an employee performing services for the employee’s employer in the course of a specified service trade or business operated by the employer are not qualified tips. The proposed regulations would clarify that this rule applies without regard to whether an owner of the trade or business is able to claim a section 199A deduction. For example, this rule applies if the employer is a corporation, even though corporations are not eligible for the deduction under section 199A.

The proposed regulations would also clarify that this rule applies even if the employee receiving tips in the course of working for an SSTB employer is working in an occupation that customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1) and is listed in proposed § 1.224-1(f). The proposed regulations would provide examples illustrating this rule.

C. Determining qualified tips for employees who participate in voluntary tip reporting programs with tip rates

Employees who enter into a Tipped Employee Participation Agreement as part of the Tip Rate Determination Agreement (TRDA) program or a Model Gaming Employee Tip Reporting Agreement as part of the Gaming Industry Tip Compliance Agreement (GITCA) program agree to report tips to their employer at or above the tip rate established by their employer for their occupational category. In exchange for the employees’ voluntary agreement to report tips at this agreed upon rate, the IRS provides tip examination protection to the employees for the taxable years in which their agreements were in effect. The proposed regulations would clarify that “qualified tips” include tips reported pursuant to an agreement under the TRDA or GITCA program provided that the participating employee in the TRDA or GITCA program is otherwise eligible for the deduction under section 224, and reports tips using the tip rates established under their agreement. Additionally, the proposed regulations would clarify that an employee participating in the TRDA or GITCA program may report additional qualified tips to the IRS on the Form 4137.

D. Other requirements

Section 224(d)(2) provides that the term “qualified tips” does not include amounts received by an individual unless such other requirements as may be established by the Secretary in regulations or other guidance are satisfied. The proposed regulations would provide that amounts received for services the performance of which is a felony or misdemeanor under applicable law are not qualified tips. In addition, the proposed regulations would provide that amounts received for prostitution services and pornographic activity are not qualified tips. Finally, to prevent reclassification of income as qualified tips, and to prevent abuse of the deduction, the proposed regulations would also provide that a payment is not a qualified tip if the tip recipient has an ownership interest in or is employed by the payor of the tip.

2. Trade or business limitations

Section 224(c) imposes a limitation on a taxpayer who receives tips in the course of a trade or business (other than the trade or business of performing services as an employee). The proposed regulations would restate the statutory limit, which is the difference between the gross income from the taxpayer’s trade or business for the taxable year minus the sum of deductions (other than the deduction for qualified tips) for that trade or business for the taxable year. The proposed regulations would clarify that the deduction allowed for qualified tips is not taken into account for this purpose because it is not a deduction associated with a trade or business.

3. Social Security numbers and married individuals

The proposed regulations would clarify that a taxpayer must include on the tax return for the taxable year the SSN, within the meaning of section 24(h)(7), of the individual who has received the tips. The proposed regulations would also restate the statutory requirement that a taxpayer who is married, within the meaning of section 7703, must file a joint return with the taxpayer’s spouse to claim the deduction allowed by section 224. The proposed regulations would further clarify that married taxpayers are only required to include the SSN of the taxpayer who has received the qualified tips to claim the deduction, and that an SSN is required of both taxpayers only when both have qualified tips for which they are claiming a deduction.

The proposed regulations would also clarify that the total amount of qualified tips that can be deducted on a return per calendar year is $25,000 regardless of filing status. After applying the $25,000 limitation, the proposed regulations would provide that the amount is subject to the phase-out based on the taxpayers’ modified adjusted gross income described in section 224(b)(2).

4. Occupations that customarily and regularly received tips on or before December 31, 2024

Under section 224(d)(1), “qualified tips” are cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. In addition, section 70201(h) of the OBBBA instructs the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1).

A. Methodology

The Treasury Department and the IRS drafted the proposed list of occupations that customarily and regularly received tips based on a review of IRS data, legislative history, and survey data regarding tipped occupations and the presence of certain factors demonstrating that those occupations customarily and regularly received tips. Because the Code does not define the phrase “customarily and regularly” regarding tips, 4 the Treasury Department and the IRS looked to dictionary definitions and other statutory provisions for guidance. The Oxford English dictionary defines the term “customarily” as “[i]n a way that follows customs or usual practices; according to custom; usually; habitually.” 5 It defines “regularly” as “in conformity to a general rule or established principle; in a steady, predictable, or uniform manner; at fixed times or uniform intervals; repeatedly, without interruption; frequently, often.” 6

The Fair Labor Standards Act (FLSA) uses the phrase “customarily and regularly” in relation to the FLSA tip credit. 7 The FLSA defines a “tipped employee” for whom an employer may take a tip credit as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. 203(t). The FLSA further provides that when an employer takes an FLSA tip credit for a tipped employee, the tipped employee must retain all of the tips the employee receives, except that this requirement “shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.” 29 U.S.C. 203(m)(2)(A). 8 United States Department of Labor (DOL) regulations provide, in part, that “[t]he phrase ‘customarily and regularly’ signifies a frequency which must be greater than occasional, but which may be less than constant.” 29. CFR 531.57. 9 DOL guidance also addresses specific occupations in which employees customarily and regularly receive tips within the meaning of the FLSA. For instance, DOL guidance interpreting the FLSA states that servers, counter personnel who serve customers, bellhops, bussers (that is, server helpers), and service bartenders are examples of occupations that “customarily and regularly receive tips” for purposes of the FLSA. 10 In guidance, and in opinion letters based on specific factual scenarios presented, DOL’s Wage and Hour Division (WHD) has looked to the FLSA’s statutory text, its legislative history, and the extent to which employees in the occupation interact with customers to determine whether an employee customarily and regularly receives tips for purposes of the FLSA. Courts similarly have considered whether an employee is in an occupation that customarily and regularly receives tips for purposes of the FLSA. 11 Based on these definitions and the guidance under the FLSA, the Treasury Department and the IRS determined that individuals must have received cash tips more often than occasionally (for example, not only on annual holidays or other celebrations) during a calendar year ending on or before December 31, 2024, in order for the occupation to be an occupation that customarily and regularly received tips on or before December 31, 2024.

With these parameters in mind, the Treasury Department and the IRS reviewed data collected from 2023 Forms W-2, Wage and Tax Statement, 12 and Forms 4137, Social Security and Medicare Tax on Unreported Tip Income, and corresponding income tax returns (Forms 1040) that reported tips in box 7 of Form W-2 (Social Security tips) or on Line 4 of an attached Form 4137. The Treasury Department and the IRS identified occupations listed on income tax returns (as reported on page 2 of Form 1040 next to the taxpayer’s signature) as having customarily and regularly received tips, based on the percentage of wage earners who reported a given occupation in the tax return data and also reported at least $100 in annual tipped income.

The Treasury Department and the IRS next determined that the data was subject to limitations that resulted in under-inclusion because the data was limited to the tax return data of individuals who reported tips to employers and received a Form W-2 or who filed Form 4137. Individuals working in certain occupations, such as rideshare drivers, receive tips but may operate as independent contractors rather than employees, and therefore do not receive a Form W-2 reporting tips, nor do they separately report their tip income for income tax purposes. 13 Because tips were not separately reported on Forms 1099-NEC, Nonemployee Compensation, 1099-MISC, Miscellaneous Information, or 1099-K, Payment Card and Third Party Network Transactions, certain occupations that received tips were not reflected in the income tax return data. In addition, the Treasury Department and IRS determined that the data may have been overinclusive due to variations in how taxpayers chose to write their occupation on Form 1040. For example, the self-reported occupation may have typographical errors or abbreviations, or taxpayers may have written multiple occupations on their Form 1040, separated by a comma or a slash mark (like “Occupation 1/Occupation 2”). 14 These variations in how taxpayers reported their occupation on Form 1040 made it difficult for the data analysis to capture all taxpayers with a given occupation (in the sense of what job they actually performed, rather than what they wrote on the Form 1040) together. This was particularly problematic for certain occupations that had more variations in how they were reported (for example, server, waitstaff, waitress, waiter).

To account for these limitations, the Treasury Department and the IRS examined occupations identified in the GITCA program, a voluntary tip reporting program for the gaming industry run by the IRS, and other similar IRS tip reporting programs as occupations that received tips on or before December 31, 2024. See Rev. Proc. 2007-32, 2007-22 I.R.B. 1322. 15 The IRS has been collecting tip data through its GITCA program (and other voluntary tip reporting programs) for over 20 years. The GITCA program requires participating employers to provide annual reports to the IRS that contain information regarding employees’ occupational categories, shifts, and outlets; gross receipts subject to food and beverage tipping; and aggregated receipts showing charged tips and reported tips. The occupations identified as having customarily and regularly received tips based on the GITCA data were largely consistent with those identified by the confidential tax return data.

The Treasury Department and the IRS also consulted the House Budget Committee report on the OBBBA, H. Rept. 119-106, at 1502 (2025), for additional information regarding occupations that traditionally and customarily received tips on or before December 31, 2024. In the explanation of the deduction for qualified tips under section 224, the report describes occupations that traditionally and customarily received tips on or before December 31, 2024, as including, but not limited to, restaurant servers, bartenders, taxi drivers, rideshare drivers, food delivery drivers, hairdressers, hairstylists, hotel bellhops, hotel housekeepers, and casino dealers. 16 To the extent those occupations were not already captured by the IRS data, they were added to the list.

Finally, the Treasury Department and the IRS examined survey data from the Panel Study of Income Dynamics that included information on occupations and tip income of both employees and self-employed individuals. The Panel Study of Income Dynamics is a nationally representative survey conducted by the University of Michigan. It includes questions about the occupation of, and tip income received by, the reference person and the person’s spouse (if they are married). The Treasury Department and the IRS consulted data from surveys conducted in years 2017, 2019, and 2023 (surveys which inquired about tips received in 2016, 2018, and 2022, respectively), which is the most recent data available (except for 2021, which was avoided due to any potential abnormalities related to the COVID-19 pandemic). The occupations identified as having customarily and regularly received tips based on this survey data were largely consistent with those identified by the confidential tax return data.

While reviewing the data, the Treasury Department and the IRS recognized that the occupations identified as having customarily and regularly received tips on or before December 31, 2024, were in service industries, and the individuals working in the occupations either interacted with the customers for whom they were providing a service or, commonly participated in tip-sharing arrangements with individuals who interacted with customers.

In defining “cash tips,” section 224(d)(3) “includes tips received from customers ..., and, in the case of an employee, tips received under any tip-sharing arrangement.” The Treasury Department and the IRS considered the language in section 224(d)(3) to indicate that, for purposes of the deduction for qualified tips under section 224, there is no distinction between employees in occupations receiving tips directly from customers and employees in occupations receiving tips through tip-sharing arrangements with other employees that interact with customers. While certain employees in tip-sharing arrangements may not have extensive, or any, customer interaction, they do assist employees who do interact with customers or otherwise contribute to the overall customer experience. For this reason, the Treasury Department and the IRS have proposed that certain occupations that may not involve direct interactions with customers should still be considered occupations that customarily and regularly received tips if employees in such occupations participated in tip-sharing arrangements such as tip pooling or tip-outs with employees who do interact with customers. For example, dishwashers reported receiving sufficient tips to appear in the IRS data and, even though they do not typically interact with customers, they may sometimes participate in tip-sharing arrangements with employees who do interact with customers (for example, waitstaff). Accordingly, dishwashers are included in the proposed list of occupations that customarily and regularly received tips for purposes of section 224.

The Treasury Department and the IRS recognize that courts and DOL have interpreted the FLSA standard for customarily and regularly somewhat differently, but this interpretation is due to differences in the specific language, purpose, and history of the FLSA tip credit and mandatory tip-sharing arrangement provisions. For instance, the FLSA provides that when an employer takes a tip credit, the employer may only require “the pooling of tips among employees who customarily and regularly receive tips.” 29 USC 203(m)(2)(A). This presumes that the employee has some level of interaction with customers to “customarily and regularly” receive tips under the FLSA. 17 In contrast, section 224(d)(3) specifically defines “cash tips” to include both tips received from customers and, in the case of an employee, tips received under any tip-sharing arrangement.

After compiling the list of occupations that customarily and regularly received tips, the Treasury Department and the IRS compared the proposed list of occupations that customarily and regularly received tips for purposes of section 224 to occupations contained in the 2018 Standard Occupation Classification (SOC) code. The SOC Code system is published by the Executive Office of the President, Office of Management and Budget (OMB). The SOC Code system is a Federal statistical standard used by Federal agencies to classify workers into occupational categories for the purpose of collecting, calculating, or disseminating data. 18 The SOC Code system classifies paid work or work for profit into occupational categories based on the work performed. All workers are classified into one of 867 detailed occupations according to their occupational definition. 19 To facilitate classification, detailed occupations are combined to form 459 broad occupations, 98 minor groups, and 23 major groups. 20 Detailed occupations in the SOC with similar job duties, and in some cases skills, education, and/or training, are grouped together. The Treasury Department and the IRS focused on the detailed occupations in the SOC Code system. However, in the process of compiling this list, the Treasury Department and the IRS determined that several of the detailed SOC codes included, in the same detailed SOC code , some occupations that customarily and regularly received tips on or before December 31, 2024, and other occupations that did not. 21

To address the issue of the over-inclusivity of certain SOC codes, the Treasury Department and the IRS created a new categorization system. The descriptions and illustrative examples for the occupation codes in this new system often mirror their SOC code counterparts. However, in situations where the SOC code was overly inclusive, the new system provides an occupation code, description, and illustrative examples that only encompass occupations that customarily and regularly received tips on or before December 31, 2024.

In addition, in certain situations where multiple detailed SOC codes described occupations that had similar titles, the new system provides an occupation code, description, and illustrative examples that stem from multiple detailed SOC codes. For example, detailed SOC codes for a variety of chefs and cooks were aggregated in the new system into a single occupation code.

Lastly, in certain situations, some detailed SOC codes were split into multiple occupation codes under the new system. For example, chauffeurs were moved from the SOC occupation “Shuttle Drivers and Chauffeurs” to the “Taxi Driver” occupation, thus creating under the new system two occupations: “Taxi and Rideshare Drivers and Chauffeurs” and “Shuttle Drivers.”

B. List of occupations that customarily and regularly received tips on or before December 31, 2024.

The proposed regulations would include the list of occupations that customarily and regularly received tips on or before December 31, 2024 (List of Occupations that Receive Tips), that was compiled based on the methodology described in this preamble. In accordance with statutory language in section 224(d)(1), the proposed regulations would provide that only occupations included in the List of Occupations that Receive Tips are eligible for the deduction in section 224(a).

This List of Occupations that Receive Tips would be organized according to the new categorization system created by the Treasury Department and the IRS specifically for this purpose, as described in this preamble. The specific occupations in the List of Occupations that Receive Tips, each assigned a three-digit code called a “Treasury Tipped Occupation Code” or “TTOC” would be grouped together in the following more general occupational 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

The List of Occupations that Receive Tips also provides the “TTOC Occupation Title” for each occupation code, a short description of the types of services performed by individuals working in an occupation included in this occupation code, illustrative examples of specific occupations that would be included under the occupation code, and the related SOC System Code(s).