The U.S. Treasury Department and Internal Revenue Service on Friday released further guidance for taxpayers who may benefit from the “tip tax exemption” provision established by President Donald Trump’s “Big and Beautiful Bill” signed into law in July.
Despite the name of this provision, tip income may still be taxed in some way. The deduction only applies to federal income taxes, so workers’ tips will still be subject to payroll taxes that fund Social Security and Medicare. You are also required to pay state income tax on your income.
Additionally, the law applies for tax years 2025 through 2028 and only allows tipped workers to deduct up to $25,000 in “qualified tips.” The deduction will be phased out for individual filers with annual incomes of more than $150,000 and couples with annual incomes of more than $300,000.
According to the IRS, an estimated 6 million taxpayers report tipped pay.
The final rules released by the IRS on Friday list more than 70 occupations that may receive deductible tips and clarify the definition of eligible tips. According to the agency, eligible occupations fall into one of eight categories.
Beverage and food service, including bartenders, waitstaff, and dishwashers Entertainment and events, including musicians, DJs, and other performers Hospitality and guest services, including concierge and housekeeping staff Home services, including repair workers and groundskeepers Personal services, including event planners, photographers, and personal care aides Grooming and wellness, including hair and makeup stylists and personal trainers Recreation and instruction, including tour guides, activity instructors, and others Golf caddy transportation and delivery (taxi and rideshare drivers, movers, delivery personnel, etc.)
According to the IRS, eligible tips must be received by workers in eligible occupations and meet several criteria, including:
Tips must be paid in cash or through a cash-equivalent means, such as a credit or debit card payment. Employees must receive tips directly from customers or through a tip-sharing pool. Tipping must be optional. For example, the automatic service charge for a large party at a restaurant cannot be deducted as a qualifying tip.
Additionally, managers and supervisors who pool tips with employees aren’t eligible to deduct that amount, but they may be able to deduct tips they receive directly, says Jeremy Wells, a certified public accountant.
IRS CEO Frank J. Bisignano said in announcing the final rule that eligible taxpayers are already benefiting from the regulations as the 2025 federal tax deadline approaches on Wednesday.
“Given the wide variety of tipped workers, these final regulations will help realize important tax benefits for American workers,” Bisignano said.
While the policy may give some workers a break, the lowest-income workers may not benefit because they don’t earn enough to pay federal income taxes. Taxpayers who make less than the standard deduction ($15,750 for individuals filing jointly or $31,500 for married couples for tax year 2025) are not required to file a federal income tax return.
More than a third of tipped workers did not earn enough to pay income taxes in 2022, according to the Yale Budget Institute, a nonpartisan policy research center.
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