Background
The One Big Beautiful Bill Act (“OB3”) introduced Section 224 to the Internal Revenue Code (“Code”), which allows individuals employed in occupations that customarily and regularly receive tips to deduct qualified tips from their taxable income in tax year 2025 through 2028 if the other requirements are met.
What is a Qualified Tip?
Section 224(d)(1) defines “qualified tips” as “cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024.” The proposed regulations, published on September 22, 2025, provide additional guidance on the definition of qualified tips as well as identifying occupations that customarily and regularly receive tips for purposes of the related income tax deduction.
According to the proposed regulations, qualified tips must be:
- Paid voluntarily, without consequence in the event of nonpayment, not subject to negotiation, and determined by the payor
- Not received in the course of a trade or business that is a specified service, trade, or business defined in §199A(d)(2). However, the 2025 transition rules defer the application of this provision until future years
- Paid in cash (including amounts charged, paid by check, gift card, tokens readily convertible to cash, or using an electronic settlement via mobile payment app)
- Received directly or indirectly via a tip-sharing arrangement
- Included in, and separately accounted for, on Forms W-2,1099-MISC, 1099-NEC, or 1099-K
Forvis Mazars Insight: If a tip is not voluntarily paid by the customer, the recipient will not be able to claim the deduction for those tips. For example, a charge automatically added to a bill for a large party or for a catering event is a service charge and not a voluntary tip.1 For certain types of employers, e.g., restaurants, this could result in an administrative burden. As such, it may be important for employers to review and revise policies and determine whether their point of sale software has the appropriate systems in place to track what is a service fee versus a qualified tip and the recipient employee(s)/payee(s), as these will need to be bifurcated to exclude nonvoluntary amounts from qualified tips that are reported.
The proposed regulations provide a table which includes lists of tipped occupations, including descriptions, illustrative examples, and the Treasury Tipped Occupation Code (TTOC) for each occupation. The list of eligible occupations falls within the general occupation groupings below:
- Beverage and Food Service
- Personal Services
- Entertainment and Events
- Personal Appearance and Wellness
- Hospitality and Guest Services
- Recreation and Instruction
- Home Services
- Transportation and Delivery
2025 Transition Guidance
Although employers are required to report qualified tips via Forms W-2, 1099-NEC, 1099-MISC, and 1099-K, these forms were not revised to reflect the changes and requirements for the tips deduction. To address this, the IRS released two notices to provide 2025 transition guidance to taxpayers and employers/payors.
Notice 2025-62 provides penalty relief to employers for calendar year 2025, only, in relation to the implementation of the new reporting obligations in connection with the deduction for qualified tips that were added to the Code by OB3. Particularly, the notice gives relief from the penalty for failure to file correct information returns and for failure to furnish correct payee statements for taxable year 2025. While not required, the IRS recommended in the notice that employers and payors provide tipped employees and payees with occupation codes and a separate accounting of cash tips via an online portal, additional written statements furnished to the employees or payees, or other secure methods so that employees or payees can still determine whether they can claim the deduction for qualified tips for tax year 2025.
Notice 2025-69 provides guidance to employees on how to determine the amount of qualified tips they received in 2025, which includes using the total amount of social security tips reported in box 7 of their Form W-2, total tips reported to employers on all Forms 4070, or, if voluntarily provided by their employer, amounts reported in box 14 of their Form W-2 (or on a separate statement). Additionally, nonemployees are instructed to calculate the amount of qualified tips (which are included in their applicable Form 1099) using earnings statements or other documentation, such as receipts, point of sale system reports, daily tip logs, or other documentary evidence.
Forvis Mazars Insight: Although Notice 2025-69 permits reliance on amounts provided in box 14 of the Form W-2, to avoid unnecessary risk, it is generally not recommended for employers to report qualified tips via box 14 in 2025. Instead, employers should consider other methods, such as online portals or additional written statements supplied to the employees or payees, or inform employees of their options under Notice 2025-62, including the option to rely on tips reported in box 7 of their 2025 Form W-2.
Special Rules for Specialized Service Trades or Businesses
Under OB3, tips received in the course of a trade or business that is a Specified Service Trade or Business (SSTB) are ineligible for the deduction. An SSTB, as defined in §199A, generally includes any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing, investment management, trading, dealing in securities, 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.
However, there is an exception to this rule in Notice 2025-69. Until January 1 of the year following the year final regulations are released, the IRS will treat the employee as having received tips in the course of a trade or business that is not an SSTB if the employee receives the tips in a tipped occupation.
Forvis Mazars Insight: Tips received in an SSTB will be eligible for the deduction until final regulations are issued and should be reported to employees and payees.
How Forvis Mazars Can Help
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- 1Rev. Rul. 2012-18