The US Treasury has issued proposed regulations that clarify how the new tip deduction under the One Big Beautiful Bill Act (OBBBA) will work. The draft rule, published Sept. 22, identifies the occupations that “customarily and regularly” received tips before Dec. 31, 2024, and lays out the definition of “qualified tips.”

The regulations are intended to implement Section 224 of the Internal Revenue Code, which allows workers in tipped occupations to deduct up to $25,000 in qualified tips from taxable income each year through 2028. The deduction phases out for individuals earning more than $150,000 in modified adjusted gross income, or $300,000 for joint filers. 

According to the proposal, qualified tips must be voluntary payments made by customers, not service charges or automatic gratuities. They can be received in cash, credit, or through approved electronic payments, including pooled arrangements among employees. However, tips tied to illegal services, or received by someone who is both an owner and a worker, are excluded. 

The Treasury compiled the list of eligible occupations using W-2 and Form 4135 data, surveys, and input from voluntary tip reporting programs. The proposed list spans food and beverage service, hospitality, personal services, transportation, entertainment, and related fields, with categories ranging from bartenders and wait staff to ride share drivers, hotel housekeepers, hairstylists, and golf caddies. 

According to Accounting Today,  the Treasury expects to issue added guidance in the near term to advise on how individuals should determine their qualified tips for 2025, An example is if an individual receives a 1099 that combines their tip and nontipped income. The Treasury is also set  to issue added guidance offering transition relief for companies that have information reporting obligations. 

The deadline for written or electronic comments regarding the proposed regulations must be received by Oct. 22. The public hearing on them will be held on Oct. 23.