The U.S. Treasury Department has unveiled a preliminary list of occupations that will be exempt from taxes on tips, aiming to fulfill President Donald Trump’s promise during his term. This initiative, part of the “One Big Beautiful Bill Act” signed in July, sets the groundwork for eligible workers to deduct up to $25,000 in “qualified” tips from their taxable income, starting with the 2025 tax year and continuing through 2028.
On September 19, the Treasury and the Internal Revenue Service (IRS) released proposed regulations detailing the criteria for which jobs qualify for this tax benefit and defining what constitutes a “qualified” tip. Workers in roles that have historically received tips on a regular basis prior to December 31, 2024, will be eligible for this deduction.
Among the listed occupations are bartenders, waitstaff, food servers, and a variety of other service-oriented jobs, including gambling dealers, clowns, DJs, entertainers, content creators, maids, electricians, plumbers, babysitters, and drivers. This wide-ranging inclusion aims to support many individuals in the service industry who depend on tip income.
For tax purposes, both itemizing and non-itemizing taxpayers can take advantage of this deduction. However, it phases out for individuals with modified adjusted gross incomes exceeding $150,000, and for joint filers, the limit is set at $300,000. Notably, married couples who file separately are ineligible for this tax benefit.
The maximum deduction available is capped at $25,000. For self-employed individuals, the deduction cannot surpass their net income from the trade or business where the tips were earned, according to IRS guidelines. However, jobs that are classified as “specified service trade or businesses” (SSTBs), such as those in healthcare, legal, financial services, and performing arts, are excluded from this program.
The definition of “qualified tips” is specifically precise. To qualify, tips must be reported to the worker’s employer and included on their W-2 forms. Self-employed workers and contractors may qualify as long as their tip income is also reported in their annual tax submissions. The IRS specifies that qualified tips must be voluntary, meaning they cannot be mandatory tips or automatically applied gratuities. Additionally, tips for illegal services, including prostitution and pornography, are explicitly excluded from eligibility.
To prevent potential misuse, the proposed regulations stipulate that tips cannot qualify if the recipient has any ownership interest in or is employed by the person providing the tip. Despite the tax benefits of this new deduction, tipped workers will still be responsible for paying Social Security and Medicare taxes, along with any applicable state and local taxes. This initiative signals an effort to bolster support for service industry workers and transform the landscape of income taxation regarding tips.
