IV. Economic Effects of the Proposed Regulations

The Treasury Department and the IRS analyzed the economic effects of the proposed regulations in enumerating the list of occupations that customarily and regularly received tips on or before December 31, 2024, the clarification that “qualified tips” excludes tips received while performing services that are misdemeanors or felonies under applicable law, and the clarification that “qualified tips” for employees under tip agreements through the TRDA or GITCA programs include tips reported using the tip rates established under their agreement and additional tips reported on Form 4137. The projected economic costs and benefits of these proposed regulations are small.

i. List of Occupations that Receive Tips

The proposed regulations enumerate the List of Occupations that Receive Tips, as described in section 70201(h) of the OBBBA. Providing this list will provide clarity for taxpayers who are expected to receive qualified tips. While these clarifications will reduce uncertainty, the Treasury Department and the IRS project that the magnitude of the efficiency gains from publishing these proposed regulations would be small.

a. Methodology

To create the List of Occupations that Receive Tips, the Treasury Department and the IRS examined confidential income tax return data from tax year 2023; data from the GITCA and related programs; the House Budget Committee report on the OBBBA, H. Rept. No. 119-106, at 1502 (2025); guidance and caselaw related to the U.S. Department of Labor (DOL) Fair Labor Standards Act (FLSA); and survey data from the Panel Study of Income Dynamics (PSID) for years 2017, 2019, and 2023 (which asks about the occupation of and tip income received by individuals in 2016, 2018, and 2022, respectively). Based on prior 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 their occupation to be considered as having customarily and regularly received tips on or before December 31, 2024.

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 the service industry, 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.

The inclusion of occupations that may not interact with customers but received tips from tip-sharing arrangements with individuals who interacted with customers departs from the interpretation of the term “customarily and regularly received tips” that courts and the DOL have used regarding the FLSA. 23 The prior guidance and court cases related to the FLSA require that the employee has some level of interaction with customers in order to be considered an occupation that customarily and regularly receives tips. 24 However, this 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 require “the pooling of tips” only among employees who customarily and regularly receive tips, 29 USC 203(m)(2)(A); this presumes that, under the FLSA, an employee is not customarily and regularly tipped merely by virtue of receiving tips from a pool. In contrast, section 224(d)(3) defines “cash tips” to include both tips receive from customers and, in the case of an employee, tips received under any tip-sharing arrangement. As a result, occupations in which employees are commonly included in tip-sharing arrangements would be considered as having “customarily and regularly” received tips for purposes of the deduction for qualified tips under section 224.

After identifying the occupations that customarily and regularly received tips on or before December 31, 2024, the Treasury Department and the IRS created a categorization system to organize and define the occupations for purposes of the deduction for qualified tips. Each occupation was assigned a TTOC code, an occupation title, a short description of the types of services performed by individuals working in the occupation, illustrative examples of specific occupations that would be included under the occupation code, and the related SOC System code(s).

b. Alternative Methods Considered

In addition to the method described above, the Treasury Department and the IRS considered two alternative methods for creating the List of Occupations that Receive Tips. These alternative methods were 1) using the SOC Code System to define occupations and 2) using only the confidential income tax return data to identify occupations that reported tips. These alternative methods both excluded some occupations that customarily and regularly received tips on or before December 31, 2024, and also included some occupations that did not in reality customarily and regularly receive tips on or before December 31, 2024. Therefore, the approach to produce the List of Occupations that Receive Tips included in these proposed regulations was selected over the alternatives described below.

One of the alternative methods that the Treasury Department and the IRS considered to construct the List of Occupations that Receive Tips was to use the occupation definitions from the SOC system. 25 However, the Treasury Department and the IRS determined that several of the detailed SOC occupations were not sufficiently detailed to separate occupations that should be included on the List of Occupations that Receive Tips, from those that should not. For example, the SOC code for “Animal Caretakers” is described in the 2018 SOC Code system as an occupation in which individuals “provide care to promote and maintain the well-being of pets and other animals that are not raised for consumption.” The specific occupations that are provided as illustrative examples for this SOC code include both pet caretakers and zookeepers. Pet caretakers provide a service to individual customers, personally interact with customers, and commonly receive tips on a frequent basis. Therefore, they would be considered an occupation that customarily and regularly receives tips. Zookeepers, on the other hand, provide a service to animals but not directly to customers. Many, if not most, zookeepers do not interact with zoo customers, and zookeepers do not receive tips on a frequent basis. Zookeeper is therefore not an occupation that customarily and regularly received tips. Thus, if the “Animal Caretakers” SOC Code were included in the list of occupations that customarily and regularly received tips, then zookeepers would become part of the list via their corresponding SOC Code, even though they did not customarily and regularly receive tips. Thus, using the SOC system alone was not sufficient for creating the List of Occupations that Receive Tips.

For the method that was selected instead of using the SOC System, 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, and it includes the SOC code(s) that are related to each TTOC occupation. Of the 867 detailed SOC codes in the 2018 SOC Code System, 77 of these codes are related to at least one TTOC occupation.

A second alternative method that the Treasury Department and the IRS considered was to use only confidential income tax return data to identify occupations that customarily and regularly received tips on or before December 31, 2024. This data includes reported tips from Form W-2 and Form 4137 and the occupation that the taxpayer (the primary filer and, if married filing jointly, the spouse) self-reports next to the taxpayer’s signature on Form 1040. Individuals in some occupations, such as rideshare drivers, often operate as independent contractors rather than employees and do not receive Form W-2 or file Form 4137 related to their rideshare activity. Thus, using only the income tax return data would have omitted these occupations, even though individuals in such occupations did in fact regularly and customarily receive tips on or before December 31, 2024. In addition, the analysis of the income tax return data may have incomplete information on certain occupations due to variations in how taxpayers choose to self-report their occupation on Form 1040. For example, the self-reported occupation may have typographical errors or abbreviations, or taxpayers may write multiple occupations separated by a comma or a slash mark, like “Occupation 1/Occupation 2.” 26 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 have more variations in how they were reported.

Due to these limitations, the Treasury Department and the IRS rejected the method of only using the tax return data to create the List of Occupations that Receive Tips. Instead, the tax return data was supplemented with data from the GITCA and related programs; the House Budget Committee report on the OBBBA, H. Rept. No. 119-106, at 1502 (2025); guidance and caselaw related to the DOL FLSA; and survey data from the PSID.

c. Statistics on Reported Tip Income in Tax Return Data

Table A below contains the List of Occupations that Receive Tips and statistics on their reported tip income. The table is organized by Treasury Tipped Occupation Code (TTOC) and contains the TTOC Occupation Title and the Related Standard Occupation Classification (SOC) System Code(s). (As previously described, the List of Occupations that Receive Tips in Table 1 of the proposed regulations also includes descriptions and illustrative examples of each TTOC occupation.) Table A summarizes taxpayer information from Tax Year 2023 on employees who have a single job, meaning they received only one Form W-2; did not file Schedule C, “Profit or Loss from Business (Sole Proprietorship),” or Schedule F, “Profit or Loss From Farming;” and did not have non-passive income from a partnership or an S-corporation on Schedule E, “Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, Real Estate Mortgage Investment Conduits, etc.).” 27

Table A shows the percentage of individuals within the Related SOC code(s) who have at least $100 of tips reported on Form W-2 or Form 4137. For example, 82.8 percent of individuals who had the SOC code related to the TTOC Occupation Title of “Bartenders” had at least $100 of tips reported on Form W-2 or Form 4137.

Table A also shows the amount of reported tips of individuals in the Related SOC code(s) as a percentage of all reported tips. The numerator of the percentage is the amount of reported tips of individuals in the Related SOC code(s) who had any tips reported on Form W-2 or Form 4137. The denominator is the amount of reported tips of all individuals, regardless of whether their occupation could be mapped to a SOC code or if their SOC code is related to a TTOC. For example, 34.2 percent of all reported tips are from individuals who had the SOC code related to the TTOC Occupation Title of “Wait Staff.”

Lastly, Table A shows reported tips as a percent of wage compensation for individuals in Related SOC code(s) who had reported tips. Wage compensation is the sum of wages, tips, and other compensation reported in Box 1 of Form W-2 and unreported tips from line 4 of Form 4137. For example, among individuals with SOC Codes related to the TTOC Occupation Title of “Gambling Dealers” who had reported tips on Form W-2 or Form 4137, reported tips were 70.7 percent of wage compensation.

Table A: Reported Tips of Single-Job Holders, Tax Year 2023

Treasury Tipped Occupation Code (TTOC) TTOC Occupation Title Percent with Reported Tips 1 Percent of All Reported Tips 2 Reported Tips as Percent of Wages of Tipped Workers 3 Related Standard Occupational Classification (SOC) System Code Beverage & Food Service 101 Bartenders 82.8 9.8 63.4 35-3011 102 Wait Staff 74.6 34.2 63.5 35-3031 103 Food Servers, Nonrestaurant 30.4 0.1 33.0 35-3041 104 Dining Room and Cafeteria Attendants and Bartender Helpers 38.9 1.0 44.8 35-9011 105 Chefs and Cooks 12.8 2.0 17.1 35-1011, 35-2011, 35-2013, 35-2014, 35-2019 106 Food Preparation Workers 21.4 3.3 33.5 35-1012, 35-2021, 35-9099 107 Fast Food and Counter Workers 40.1 1.4 17.9 35-3023 108 Dishwashers 11.0 0.1 15.8 35-9021 109 Host Staff, Restaurant, Lounge, and Coffee Shop 46.3 0.8 35.3 35-9031 110 Bakers 12.0 0.1 14.7 51-3011 Entertainment & Events 201 Gambling Dealers 70.9 4.3 70.7 39-3011, 39-1013, 39-3013 202 Gambling Change Persons and Booth Cashiers 78.0 0.4 64.8 41-2012 203 Gambling Cage Workers 37.6 0.2 57.7 43-3041 204 Gambling and Sports Book Writers and Runners 30.0 * 43.3 39-3012 205 Dancers 8.8 * 54.3 27-2031 206 Musicians and Singers 2.9 * 36.8 27-2042 207 Disc Jockeys, Except Radio 15.7 * 44.9 27-2091 208 Entertainers and Performers 7.9 * 52.0 27-2099 209 Digital Content Creators 7.9 * 52.0 27-2099 210 Ushers, Lobby Attendants, and Ticket Takers 3.1 * 11.6 39-3031 211 Locker Room, Coatroom, and Dressing Room Attendants 12.0 * 19.1 39-3093 Hospitality & Guest Services 301 Baggage Porters and Bellhops 7.0 0.1 18.6 39-6011 302 Concierges 3.7 * 11.7 39-6012 303 Hotel, Motel, and Resort Desk Clerks 11.7 0.7 42.8 43-4081 304 Maids and Housekeeping Cleaners 2.7 0.1 10.6 37-2012 Home Services 401 Home Maintenance and Repair Workers 0.5 0.1 16.1 49-9071, 49-9098, 49-9099, 49-9063, 49-2097, 51-7021 402 Home Landscaping and Groundskeeping Workers 0.5 * 14.0 37-3011 403 Home Electricians 0.1 * 10.6 47-2111 404 Home Plumbers 0.2 * 5.1 47-2152 405 Home Heating and Air Conditioning Mechanics and Installers 0.2 * 4.0 49-9021 406 Home Appliance Installers and Repairers 1.8 * 1.9 49-9031 407 Home Cleaning Service Workers 2.7 0.1 10.6 37-2012 408 Locksmiths 2.0 * 3.1 49-9094 409 Roadside Assistance Workers 0.2 * 10.8 49-3023, 53-3032 Personal Services 501 Personal Care and Service Workers 0.6 0.1 31.1 31-1122, 39-9099 502 Private Event Planners 5.9 0.1 16.3 13-1121, 27-1023 503 Private Event and Portrait Photographers 2.3 * 22.0 27-4021 504 Private Event Videographers * * * 27-4031 505 Event Officiants 0.2 * 16.8 21-2011 506 Pet Caretakers 19.1 0.3 16.2 39-2021 507 Tutors 0.5 * 34.5 25-3041 508 Nannies and Babysitters 0.7 * 28.8 39-9011 Personal Appearance & Wellness 601 Skincare Specialists 54.7 0.5 24.4 39-5094 602 Massage Therapists 55.8 0.6 25.7 31-9011 603 Barbers, Hairdressers, Hairstylists, and Cosmetologists 52.4 3.2 22.7 39-5012, 39-5011 604 Shampooers * * * 39-5093 605 Manicurists and Pedicurists 36.2 0.3 14.9 39-5092 606 Makeup Artists 13.1 * 14.8 39-5091 607 Exercise Trainers and Group Fitness Instructors 1.0 * 25.8 39-9031 608 Tattoo Artists and Piercers 11.1 * 15.8 27-1019 609 Tailors 0.8 * 15.9 51-6052 610 Shoe and Leather Workers and Repairers * * * 51-6041 611 Eyebrow Threading and Waxing Technicians 53.2 3.0 22.6 39-5012 Recreation & Instruction 701 Golf Caddies 8.0 * 27.9 39-3091 702 Self-Enrichment Teachers 1.9 * 7.5 25-3021 703 Sports and Recreation Instructors 1.9 * 7.5 25-3021 704 Tour Guides 14.2 * 17.1 39-7011 705 Travel Guides 13.3 * 16.2 39-7012 706 Recreational and Tour Pilots * * * 53-2012 Transportation & Delivery 801 Parking and Valet Attendants 17.4 0.1 21.5 53-6021 802 Taxi and Rideshare Drivers and Chauffeurs 24.9 * 21.2 53-3054 803 Shuttle Drivers 16.7 0.1 28.0 53-3053 804 Goods Delivery People 3.7 0.5 30.0 53-3031 805 Personal Vehicle and Equipment Cleaners 4.8 * 12.4 53-7061 806 Private and Charter Bus Drivers 0.7 * 9.9 53-3052 807 Water Taxi Operators and Charter Boat Workers * * * 53-5022 808 Rickshaw, Pedicab, and Carriage Drivers 0.8 * 21.4 53-6099 809 Home Movers 2.5 2.8 32.8 53-7062 Total 67.4 4 44.6 Notes: Data are for Tax Year 2023. An * indicates a share of less than 0.1% or a small cell size. 1 Percentage of individuals within the Related SOC code(s) who have at least $100 of tips reported on a W-2 or Form 4137 ("reported tips"). 2 Reported tips of individuals in Related SOC code(s) as a percentage of all reported tips. The denominator includes all individuals regardless of whether their occupation could be mapped to a SOC code or if their SOC code is related to a TTOC code. 3 Reported tips of individuals in Related SOC code(s) as a percentage of wages of individuals with tips in Related SOC code(s). The denominator includes wages of individuals in Related SOC code(s) only if they report tips 4 Occupation codes are matched to SOC codes, which are then related to TTOC occupation titles, using the self-reported character strings in the “Your occupation” box next to the signature box on the Form 1040. The occupation box does not affect a taxpayer’s tax liability, and taxpayers with a single W-2 sometimes enter an occupation (character string) that does not correspond to the W-2. For example, a student who was also a bartender might have entered “Student” in the occupation box, or they may have misspelled “bartender” as “batrender”. In either case, we would not be able to match the “Student” or “batrender” who received tips to a TTOC code. These data shortcomings are the primary reason that the percentage of all reported tips for occupations listed in the table sum to only 67.4%. Source: Office of Tax Analysis, August 9, 2025

d. Economic Effects

In general, OBBBA granted taxpayers the deduction for income earned in the form of qualified tips. In the absence of the list enumerated by these proposed regulations, two taxpayers with otherwise similar tax situations would face uncertainty as to whether this tax deduction applies to their situation. In the absence of this guidance, these taxpayers might make different choices as to whether their tips qualify for the deduction, and, therefore, face different tax liability. By enumerating the List of Occupations that Receive Tips, these proposed regulations ensure that these two taxpayers face the same tax treatment.

Consider an example where Employee A is a hairstylist and Employee B is a makeup artist, both working at Beauty Salon 1. Employee A and Employee B each receives $10,000 in tips from customers at Beauty Salon 1. The House Budget Committee report on the OBBBA, H. Rept. 119-106, at 1502 (2025) included hairstylists but not makeup artists in its examples of occupations that traditionally and customarily 28 received tips on or before December 31, 2024. Thus, prior to reading the guidance in theses proposed regulations, Employee B might have been unsure whether her occupation as a makeup artist makes her eligible to claim the deduction for her qualified tips. By enumerating this list, Employee A and Employee B have clarity that they are both eligible to use the $10,000 in tips that they receive while working at Beauty Salon 1 for purposes of the deduction in section 224 (assuming that all other requirements to claim the deduction are satisfied).

Some taxpayers may reclassify their occupation as described on their Form 1040 to fall under a category that appears on the List of Occupations that Receive Tips. This reclassification would merely be a relabeling of their reported occupation and does not constitute a meaningful economic change. Due to the tax preference granted by the statute, some taxpayers may genuinely change occupations to one which appears on the List of Occupations that Receive Tips. This effect is ascribed to the statute.

ii. Illegal Activity

The proposed regulations clarify that the term “qualified tips” does not include tips that were received while performing a service that is a felony or misdemeanor under applicable law. For example, tips received while performing services in human trafficking, exotic pet smuggling, counterfeiting or fencing stolen goods, drug trafficking, drug dealing, and unlicensed sales that violate the applicable law would not be eligible for the deduction for qualified tips. The Treasury Department and the IRS do not have sufficient data to determine the behavioral effects of the clarification that the tips are excluded from the definition of “qualified tips” if they were earned while performing illegal activities. The Treasury Department and the IRS also do not have readily available data and models to assess the economic costs and benefits of excluding these tips from the definition of “qualified tips,” but the economic impact is expected to be low. However, the Treasury Department and the IRS invite comments on such costs and data that could be used to analyze these behavioral effects.

For example, consider Employee C who works as a bartender but does not have the license or certification that is required based on the applicable laws, and these laws specify that serving alcohol without a license is a misdemeanor. Employee C receives $10,000 in tips during the year while serving alcohol at a bar. “Bartender” is on the List of Occupations that Receive Tips, but serving alcohol as a bartender without the proper license violates the applicable law. Because the proposed regulations clarify that the definition of “qualified tips” excludes tips received while performing services that violate the applicable law, Employee C is aware that the $10,000 in tips received while serving alcohol without a license are not qualified tips, and so Employee C does not claim the deduction for these tips.

Alternatively, consider a different example where Restaurant 2 includes a bar that serves alcohol but does not have the liquor license required by the applicable laws. Employee D works on the wait staff at Restaurant 2 and does not serve alcohol, which the applicable laws allow. Employee D receives $10,000 in tips while waiting tables at Restaurant 2. They satisfy all other requirements to claim the deduction under section 224. Because the proposed regulations clarify that “qualified tips” exclude tips received while performing services that are illegal under applicable law, and the services that Employee D provided as a wait person were legal, Employee D understands that the $10,000 in tips are considered “qualified tips” and Employee D claims the deduction accordingly.

The clarification in the proposed regulations, that tips are not considered “qualified tips” if they were received while performing services that are illegal under applicable law, provides clarity for taxpayers about whether their tips qualify for the tax deduction under section 224, as instituted by the OBBBA.

iii. Employees Participating in Voluntary Tip Reporting Programs with Tip Rates

The proposed regulations clarify that employees who enter into a tip agreement through the TRDA or GITCA program may determine the amount of their qualified tips using applicable tip rates in their agreement (as these tips are reported on Form W-2), as well as amounts reported to the IRS on Form 4137. This would not affect the behavior of employees in agreements under the TRDA or GITCA programs as they are required to report their tips (regardless of whether they are eligible for the deduction under section 224) using average tip rates for their occupational category that their employer and the IRS have established.

For example, suppose Employee E and Employee F both work as gambling dealers at Casino 3, and they both have a tip agreement as part of the GITCA program. Employee E receives $11,000 in tips for the year, and Employee F receives $12,000 in tips. The tip rate established by the IRS and their employer for their occupation in the tip agreement requires them to report $10,000 in tips. The Forms W-2 for Employee E and Employee F from Casino 3 each report $10,000 in tips. Due to the clarification in the proposed regulations about the definition of “qualified tips” for employees under a tip agreement through the TRDA or GITCA program, Employee E and Employee F each understand that they may claim a deduction for $10,000 in qualified tips (if the other requirements of section 224 are met) as those tips were reported to the IRS and Casino 3 in accordance with the tip rate established in their tip agreement.

Some employees under a tip agreement through the TRDA or GITCA programs may decide to report the full amount of their tips (in excess of the tip rate established in their tip agreement) to the IRS on Form 4137 or to their employer. These employees would use that full amount as qualified tips for the deduction under section 224. Any change in the reporting of tip income in excess of the established tip rates is ascribed to the statute, which creates the deduction for qualified tips that are reported on Form W-2 or Form 4137 (as well as Form 1099-NEC, Form 1099-K, and Form 1099-MISC).

iv. Summary

Based on the available models and data, the Treasury Department and the IRS estimate that the economic costs and benefits of the proposed regulations would be small. The Treasury Department and the IRS invite public comments and additional data on the economic effects that would result from these proposed regulations.