Unpacking the No-Tax on Tips Proposal: Key Questions and Implications
I. Overview of Section 224 and Proposed Regulations
The One Big Beautiful Bill Act of 2025 introduced Section 224 of the Internal Revenue Code, establishing a below-the-line deduction for qualified tip income. P. L. 119-21, § 70201, 139 Stat. 72, 170-173. The provision allows eligible individuals to deduct up to $25,000 per year in qualified tips received in taxable years beginning after December 31, 2024. The deduction is scheduled to sunset after 2028. I.R.C. § 224(h).
On September 22, 2025, the Treasury Department and Internal Revenue Service published proposed regulations under Section 224, identifying occupations that customarily and regularly received tips on or before December 31, 2024, and defining qualified tips for purposes of the deduction. REG-110032-25, 90 Fed. Reg. 45,340. These proposed regs represent the government's initial implementation framework for the ‘No Tax on Tips’ rules expected to affect millions of American workers.
To qualify for the deduction, tips must be voluntarily paid by the customer without negotiation and must be in the form of cash, including credit cards, debit cards, gift cards, and electronic payment applications. I.R.C. § 224(d)(2)(A). Tips must be reported on Forms W-2 or 1099 furnished to the taxpayer, or on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. I.R.C. § 224(a). The deduction phases out once modified adjusted gross income exceeds $150,000 for single filers or $300,000 for married couples filing jointly. I.R.C. § 224(b)(2)(A).
Taxpayers should note several important limitations to the deduction. No deduction is allowed for tips received by employees whose employer operates a specified service trade or business or SSTB (defined in Section 199A(d)(2)), or by independent contractors whose own trade or business qualifies as an SSTB. I.R.C. § 224(d)(2)(B). For self-employed taxpayers, the deduction cannot exceed net income from the business in which the tips are received. I.R.C. § 224(c). Additionally, taxpayers must possess a valid Social Security Number to claim the deduction, and married recipients must file jointly. I.R.C. §§ 224(e), 224(f).
The proposed regs establish the Treasury Tipped Occupation Code (TTOC) system, which identifies eligible occupations based on data from 2023 confidential return information and the 2023 Panel Study of Income Dynamics. 90 Fed. Reg. 45,340, 45,348. The TTOC list includes traditional tipped occupations like restaurant servers, bartenders, taxi drivers, hairdressers, hotel staff, and casino dealers, as well as less conventional categories like goods delivery workers and certain personal service providers (other than SSTBs).
II. Concerns of Commenters
Various industry groups and professional organizations have submitted comments on the proposed regs since publication seeking change or clarification regarding several key issues.
Anti-Abuse Rule and Ownership Interest
The proposed regs contain an anti-abuse provision stating that tips received by employees or service providers who have an ownership interest in or are employed by the payor are not qualified tips. Prop. Treas. Reg. § 1.224-1(c)(9). The ABA Section of Taxation identified this rule as potentially problematic because it lacks a definition of ownership interest and does not address constructive ownership, attribution, or de minimis thresholds. ABA Comments, pg. 5.[1]
The ABA provided an example of a restaurant server who owns ten shares of a Fortune 500 corporation's stock. If employees of that corporation's local office dine at the restaurant and pay with a corporate credit card, the server's tips would be disqualified under the proposed rule despite the server having only a de minimis, incidental ownership interest. The organization recommended limiting the anti-abuse rule to situations where the tipped worker knows or reasonably should know that the ultimate source of funds is an employer, and where the tip exceeds the customary range. ABA Comments, pg. 6.
Specified Service Trade or Business (SSTB) Limitation
The SSTB limitation creates particular uncertainty for workers in trades or businesses where the principal asset is the reputation or skill of employees. I.R.C. § 199A(d)(2). The existing SSTB regulations at Treas. Reg. § 1.199A-5(b) define this category to include businesses where a person earns income from endorsing products, licensing their name or likeness, or appearing at events. Treas. Reg. § 199A-5(b)(2)(xiv)(A)-(C). The influencer economy is a top-of-mind cohort that continues to test intuitions of practitioners beyond taxation.
The ABA raised concerns about seemingly arbitrary and puzzling outcomes under the SSTB Rules. For example, the proposed regs provide examples of a self-employed comedian (who performs services in the SSTB of performing arts) who cannot deduct tips, whereas a pianist employed by a hotel (which is not an SSTB) can deduct tips.
The ABA commentary also explored a hypothetical involving a sous chef employed by a restaurant who gives a cooking demonstration at a private catered event. The question remains whether this appearance makes the chef an SSTB, disqualifying some or all tips received, or whether this situation resembles a singer employed by a restaurant who may still deduct tips. ABA Comments, pg. 7. The regulations do not define terms like "appearance at an event" or "well-known," creating uncertainty about when occasional demonstrations or media moments while working for a non-SSTB employer trigger SSTB classification.
Self-Employed Taxpayer Reporting Requirements
Self-employed taxpayers face unique challenges under the proposed framework. Section 224 requires qualified tips to be included in payee statements furnished under various code sections, including Forms 1099-NEC. I.R.C. § 224(a). Many occupations on the TTOC list involve self-employed taxpayers who provide services to households, such as home plumbers, pet caretakers, tutors, babysitters, and hairdressers. These workers typically do not receive Forms 1099-NEC from their customers. ABA Comments, pg. 8.
Self-employed taxpayers may receive Form 1099-K if they accept payment by credit or debit card and customers include tips on charges, or if they use third-party settlement organizations, but only if charges exceed $20,000 and 200 transactions annually. I.R.C. § 6050W. The ABA recommended that the IRS create a form similar to Form 4137 for self-employed taxpayers to report tip income and provide a safe harbor for contractors who maintain records documenting amounts that would otherwise qualify as tips for 2025. ABA Comments, pg. 8.
Digital Payment Platforms and Electronic Tips
The digital economy presents classification challenges for tip income. The National Taxpayers Union Foundation (NTUF) requested clarification on specific tipping methods eligible for digital creators, particularly regarding income from streaming platforms, subscription platforms like Twitch, Patreon, or Kick, and platforms like TikTok that allow tips through third-party processors like Stripe. NTUF Comments, pg. 2.[2]
The proposed regulations define cash tips to include any form of electronic settlement or mobile payment application denominated in cash, which appears to encompass tips provided through third-party settlement organizations like PayPal, Venmo, and CashApp. 90 Fed. Reg. 45,340, 45,342. The NTUF recommended that subscription-based platforms offering exclusive content access should not qualify, whereas electronic payments that do not provide exclusive content access, are not recurring, and allow the tip amount to be entirely determined by the payer should be considered eligible. NTUF Comments, pg. 2.
The NTUF also requested clarification that certain stablecoins meeting regulatory specifications under the Guiding and Establishing National Innovation for U.S. Stablecoins Act should be included in the definition of cash tips. Collateralized stablecoins backed by reserves of U.S. dollars or similarly liquid assets would maintain the fixed value necessary to qualify as tokens exchangeable for a fixed amount of cash. NTUF Comments, pg. 3. P. L. 119-27.
Employer Reporting and Compliance Burdens
The mid-year enactment and retroactive application of Section 224 created significant compliance challenges for employers. The American Hotel and Lodging Association expressed concern that employers need guidance regarding documentation and reporting procedures for tax year 2025 to ensure timely compliance. The organization requested that the IRS provide a simple standard reporting method for employers to report estimated qualified cash tips for 2025, as businesses need time to update payroll systems. IRS Hearing Transcript, pg. 7.[3]
The IRS announced it would not change information return forms for 2025. IR-2025-82. During the October 23, 2025 public hearing, the American Hotel and Lodging Association also requested guidance regarding employees who transition between jobs receiving tips and those that do not, such as a manager or supervisor position. Additional guidance was requested regarding which TTOC to use in Box 14B on Form W-2 for employees who transition from one tipped position to another within the same year. IRS Hearing Transcript, pg. 8.
App-Based Delivery Workers
The Workplace Policy Institute urged the IRS to explicitly refer to independent app-based delivery workers in the final regulations. While the proposed regs include category 804 for goods delivery workers, which implicitly covers app-based delivery providers, Congress specifically referenced food delivery drivers and rideshare drivers in its conference report as core intended beneficiaries of the tax relief. H.R. Rep. No. 119-106, at 1502. WPI Comments, pg. 5.[4]
App-based delivery platforms now contribute as much as $212 billion to the U.S. economy annually, with nearly 7.3 million people offering delivery services. These providers account for as much as 4.3 percent of all workers. Tips represent a significant portion of their income, making up approximately half of total revenue according to studies in New York City. WPI Comments, pg. 2.
Occupation List Methodology and Updates
The ABA recommended that the IRS publish the TTOC list as a revenue procedure and update it annually rather than reissuing regulations, noting the list was derived from data collected during or before 2023 and may be incomplete or obsolete. For example, the Transportation and Delivery category does not include gas station attendants, despite certain states requiring such attendants and tipping being customary for workers who pump gasoline. ABA Comments, pg. 9.
III. Recommendations and Comments for Affected Taxpayers
Helpful Measures for TY 2025
Taxpayers claiming the Section 224 deduction for 2025 should begin compiling documentation now. Because the statute requires tips to be reported on Forms W-2, 1099, or Form 4137, employees should verify that their employers are properly tracking and reporting qualified tips separately from other compensation. Self-employed taxpayers should maintain detailed contemporaneous records of all tip income, including date, amount, payor when known, and method of payment, even if not reported on information returns.
For taxpayers who work multiple jobs, careful analysis is required to determine whether each employer operates a SSTB. The flush language of Section 224(d)(2)(B) treats employees as receiving tips from a SSTB if their employer is a SSTB, regardless of whether the employee personally performs services in a specified field. An employee working both at a law firm and a restaurant must exclude tips received at the law firm but may deduct tips received at the restaurant.
Taxpayers should calculate their modified adjusted gross income to determine whether they fall within the phaseout range. The $25,000 maximum deduction is per taxpayer regardless of filing status, not per return, creating a marriage penalty for two tipped workers. I.R.C. § 224(b)(1). Married taxpayers must file jointly to claim any deduction. I.R.C. § 224(f).
Ownership Interest Questions
Taxpayers who own equity interests, including mutual funds, retirement accounts, or employer stock, should consider whether customers who provide tips might include entities in which the taxpayer has an ownership interest and whether the taxpayers’ profession and nature of clientele presents a reasonable likelihood of such ownership. Under a strict reading of the proposed anti-abuse rule, even minimal ownership in the tipper could disqualify tips. Prop. Treas. Reg. § 1.224-1(c)(9).
Until final regulations clarify this issue, conservative taxpayers may wish to exclude tips where they have reason to know of an employment or ownership relationship with the payor. Employees receiving tips should not be required to investigate the corporate structure of every customer, however. Ordinary, genuine, and reasonable ignorance would protect a recipient taxpayer if the final regulations adopt a knowledge standard as recommended by the ABA. Without an explicit safe harbor for de minimis, indirect, or constructive ownership, or where a taxpayer reasonably lacks knowledge, there remains a technical argument for disallowing deductions in hard-to-spot circumstances.
Digital Platforms and Electronic Payments
Digital content creators and app-based service providers face particular uncertainty because, as is increasingly the case in our ever-evolving economy, legislation has not kept pace with industry in this area. Tips received through subscription platforms that provide exclusive access to content likely do not (and probably should not) qualify for deduction, as these payments may be considered negotiated compensation as opposed to voluntary gratuity. Tips received through platforms that allow voluntary, non-recurring payments set by the customer, such as TikTok's tipping feature through Stripe, have stronger arguments for voluntariness as they are discretionary and could be cancelled by the payor at any time without affecting services received.
Service providers using TPSOs should ensure these platforms report tip income separately on Forms 1099-K or 1099-NEC where possible. Because the IRS has not provided specific guidance for digital creators, these taxpayers should document the voluntary nature of payments, the absence of exclusive content access tied to payment amounts, and the customer's unilateral, discretionary determination of tip amounts.
SSTB Classification Issues
Workers in performing arts, consulting, or businesses where reputation or skill constitutes a principal asset must carefully evaluate their classification. An employee working for a non-SSTB employer generally qualifies even if performing services that would constitute a SSTB if self-employed. However, the regulations provide limited guidance on when occasional appearances, demonstrations, or endorsements trigger SSTB classification.
Workers who make media appearances, provide demonstrations, or engage in promotional activities while primarily employed by non-SSTB employers should document that these activities are incidental to their primary employment duties. Until the IRS provides a de minimis safe harbor, conservative taxpayers should carefully analyze and document deduction positions taken with respect to any tips received in connection with reputation-based activities.
Planning for Sunset and Future Changes
The Section 224 deduction sunsets after 2028 unless extended. I.R.C. § 224(h). Taxpayers should not engage in long-term planning that assumes availability. But tipped workers and affected businesses should understand the deduction, regs, and related guidance to ensure eligibility, compliance, and the maximum tax benefit while the deduction remains effective.
Industry groups and professional organizations continue to advocate for changes to the proposed regs. Taxpayers affected by specific provisions should monitor developments and consider submitting comments on issues affecting their circumstances. The IRS has demonstrated willingness to refine its approach based on stakeholder feedback, as indicated by the recent public hearing held on October 23, 2025.
Compliance and Audit Risk
The proposed regs and commentary introduce unanswered questions for taxpayers claiming the deduction and businesses seeking to comply with related reporting requirements, particularly in interpreting and determining the SSTB and anti-abuse rules and substantiating eligibility.
Taxpayers should maintain documentation sufficiently detailed to demonstrate that tips were paid voluntarily without negotiation, that the payor determined the amount unilaterally, and that no consequence attached to nonpayment. It is not yet clear the degree to which affirmative proof will be required beyond documentation already kept in the ordinary course of routine tipping transactions. Other questions are more clearly addressed: service charges, automatic gratuities, and mandatory additional charges do not qualify, even if distributed to employees. Prop. Treas. Reg. § 1.224-1(c)(2).
For workers in occupations not explicitly listed in the TTOC, claiming the deduction is less certain. The IRS could challenge whether an unlisted occupation customarily and regularly received tips on or before December 31, 2024. Affected taxpayers should consider evidence of industry tipping practices, including surveys, industry publications, or testimony from workers in the same field.
The Section 224 deduction represents significant tax relief for middle-income workers who derive substantial compensation from tips. To avail themselves of the deduction, taxpayers should pay careful attention to documentation requirements, categorical eligibility, SSTB limitations, and anti-abuse rules. As the IRS refines its guidance in response to comments, taxpayers must understand how changes and guidance will affect their eligibility and compliance obligations.
References
Code & Regulations
1. An Act to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14 (One Big Beautiful Bill Act), Pub. L. No. 119-21, §§ 70201(f), (j)-(k), 139 Stat. 72, 170-73 (2025).
2. Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), Pub. L. No. 119-27 (2025).
3. I.R.C. §§ 224, 199A(d)(2), 1202(e)(3)(A), 6001, 6041, 6041(a), 6041(d)(3), 6041A(e)(3), 6050W, 6050W(f)(2), 6051(a)(18) (2025).
4. Prop. Treas. Reg. §§ 1.224-1(a), (c)(2), (c)(4), (c)(4)(ii)-(iii), (c)(9), (d), (f), 90 Fed. Reg. 45,340 (Sept. 22, 2025).
5. Treas. Reg. §§ 1.199A-5(b), 1.199A-5(b)(2)(xiv), 1.199A-5(b)(2)(xiv)(A)-(C), 1.199A-5(b)(3)(xv)-(xvi).
Legislative History
6. H.R. Rep. No. 119-106, at 1502 (2025) (Conf. Rep.).
Administrative Guidance
7. I.R.S. News Release IR-2025-82 (Aug. 7, 2025).
8. Rev. Proc. 2025-32, 2025-44 I.R.B. 1.
Public Comments and Hearing Transcripts
[1] American Bar Association Section of Taxation, Comments on Proposed Regulations under Section 224 Regarding the Deduction for Tip Income. (Oct. 22, 2025).
[2] National Taxpayers Union Foundation, Comment Letter on Proposed Rule on Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips. REG-110032-25. (Oct. 22, 2025).
[3] Transcript of Teleconference Public Hearing on Proposed Regulations, Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips. REG-110032-25. (Oct. 23, 2025).
[4] Workplace Policy Institute, Comment Letter on Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips. IRS REG-110032-25. (Oct. 16, 2025).
