New Tax Guidance for Tipped Workers Released by IRS

The U.S. Treasury’s Internal Revenue Service (IRS) announced new guidance on Friday aimed at helping taxpayers who may benefit from a tax provision related to tips. This provision, part of the legislation dubbed the “Big and Beautiful Bill” signed by President Donald Trump in July, allows eligible workers to take advantage of a “tip tax exemption.”

However, it’s important to note that while the provision is beneficial, tip income can still be subject to certain taxes. Specifically, this deduction impacts only federal income taxes, meaning that workers’ tips will still face payroll taxes tied to Social Security and Medicare. Also, state income tax still applies.

This new rule is effective for tax years 2025 to 2028. It lets tipped workers deduct a maximum of $25,000 in what are termed “qualified tips.” But, there’s a catch: the deduction phases out for individuals earning over $150,000 and couples making more than $300,000 annually.

An estimated 6 million taxpayers report receiving tip income, according to data from the IRS.

On Friday, the IRS outlined over 70 occupations eligible for this deduction, categorizing them into eight groups:

1. Beverage and food service: bartenders, waitstaff, and dishwashers.
2. Entertainment and events: musicians, DJs, and performers.
3. Hospitality and guest services: concierge and housekeeping staff.
4. Home services: repair workers and groundskeepers.
5. Personal services: event planners, photographers, and caregivers.
6. Appearance and health: hairdressers and personal trainers.
7. Recreation and instruction: tour guides and golf caddies.
8. Transportation and delivery: taxi and rideshare drivers, movers, and delivery personnel.

The IRS specifies that eligible tips must meet several criteria:

1. They must be given in cash or via cash-equivalent methods, like a credit card.
2. Employees need to get tips directly from customers or through tip-sharing groups.
3. Tipping must be voluntary; automatic service charges are not qualifying tips.

Additionally, managers who share tips with their teams cannot deduct those amounts, though they might be able to deduct tips they receive directly, as noted by CPA Jeremy Wells.

Frank J. Bisignano, IRS CEO, mentioned that these new regulations will help convey significant tax benefits to eligible American workers as the 2025 federal tax deadline draws near.

While this new policy might help some, it’s worth considering that lower-income workers may not see advantages since they often do not earn enough to owe federal income taxes. In fact, taxpayers below the standard deduction threshold—$15,750 for individuals and $31,500 for married couples for tax year 2025—don’t need to file a federal return.

Research indicates that more than a third of tipped workers did not earn enough to pay income tax in 2022.