On September 22, the IRS issued proposed regulations to provide guidance on the “no tax on tips” provision of Public Law 119-21, known as the One Big Beautiful Bill Act (OBBBA) [90 F.R. 45340, 9-22-25].
The OBBBA adds IRC §224, which defines the income tax deduction for qualified tips received during the taxable year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. Employers will still withhold federal income tax and social security and Medicare taxes. To claim the deduction, a worker must both work in an occupation on the list and receive qualified tips. The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.
The Proposed Regulations
The proposed regulations define “qualified tips” and list occupations that “customarily and regularly receive tips.” Qualified tips must be paid in cash or an equivalent medium (e.g., check, credit card), received from customers or through a tip-sharing agreement, and paid voluntarily by the customer and not subject to negotiation. There are nearly 70 separate occupations of tipped workers, from bartenders to water taxi operators.
The IRS has not released guidance on how employers will report tips for tax year 2025. The OBBBA denotes tax year 2025 as a transition year. For qualified tips reported prior to January 1, 2026, employers would be permitted to approximate tips “by any reasonable method specified by the Secretary” of the Treasury.
Plan Ahead for Year-End
To learn how the OBBBA will affect your year-end processing and to prepare for changes in 2026, plan to attend one of PayrollOrg’s Preparing for Year-End programs. This seminar provides updates on the latest changes in legislation and regulations that affect the close of 2025 and the first payroll of 2026.
To learn more about federal and state laws, regulations, and information to keep your company's payroll operations in compliance, check out Payroll Source Plus!
Jyme Mariani, Esq., is Director of Payroll Information Resources for PayrollOrg.
