This document contains interim final amendments to 26 CFR part 300 regarding user fees to apply for or renew a PTIN.

The Independent Offices Appropriation Act of 1952 (IOAA), which is codified at 31 U.S.C. 9701, authorizes agencies to prescribe regulations that establish user fees for services provided by the agency. The IOAA provides that regulations implementing user fees are subject to policies prescribed by the President; these policies are set forth in the Office of Management and Budget Circular A-25, 58 FR 38142 (July 15, 1993) (OMB Circular A-25).

Under OMB Circular A-25, Federal agencies that provide services that confer benefits on identifiable recipients are to establish user fees that recover the full cost of providing the service. An agency that seeks to impose a user fee for government-provided services must calculate the full cost of providing those services. In general, a user fee should be set at an amount that allows the agency to recover the direct and indirect costs of providing the service, unless the Office of Management and Budget (OMB) grants an exception. OMB Circular A-25 provides that agencies are to review user fees biennially and update them as necessary.

The IRS follows generally accepted accounting principles (GAAP) in calculating the full cost of administering PTIN applications and renewals. The Federal Accounting Standards Advisory Board (FASAB) is the body that establishes GAAP that apply for Federal reporting entities, such as the IRS. FASAB publishes the FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as Amended (Current Handbook), available at https://files.fasab.gov/pdffiles/2024_FASAB%20Handbook.pdf. The Current Handbook includes the Statement of Federal Financial Accounting Standards (SFFAS) No. 4: Managerial Cost Accounting Standards and Concepts. SFFAS No. 4 establishes internal costing standards to accurately measure and manage the full cost of Federal programs, and the methodology below is in accordance with SFFAS No. 4.

1. Cost Estimation of Direct Salary

The IRS uses various cost-measurement techniques to estimate the cost attributable to the program. These techniques include using various timekeeping systems to measure the time required to accomplish activities, or using information provided by subject-matter experts on the time devoted to a program. To determine the salary and benefits cost incurred to provide the service of providing a PTIN, the IRS estimated the number of full-time employees required to conduct activities related to the costs of issuing and renewing PTINs. The number of full-time employees is based on both current employment numbers and future hiring estimates. The IRS aggregated the hours spent by employees for performing each task, identified by cost center, related to the PTIN user fee, and calculated the percentage of time spent on the PTIN user fee based on a full-time schedule of 2,088 hours annually, with leave and training hours allocated to the resulting percentages based on employees’ tasks related to the PTIN user fee.

2. Overhead

When the indirect cost of a service or activity is not specifically identified from the cost accounting system, an overhead rate is added to the identifiable direct cost to arrive at full cost. Overhead is an indirect cost of operating an organization that is not specifically identifiable with an activity. Overhead includes costs of resources that are jointly or commonly consumed by one or more organizational unit’s activities but are not specifically identifiable to a single activity. These costs can include:

To calculate the overhead allocable to a service, the IRS applies an overhead rate to the identified direct salary and benefits and other direct costs. The overhead rate is the ratio of the IRS’s indirect salary, benefits, and non-salary costs of business divisions that do not interact with taxpayers to the salary and benefits costs of business divisions that interact with taxpayers. The IRS calculates an overhead rate annually. For the FY 2025 user fee review, an overhead rate of 62.92 percent was used.

3. Calculation of PTIN User Fee

The IRS used projections for FYs 2026 through 2028 to determine the direct and indirect costs associated with the PTIN program that are includible in the PTIN user fee calculation taking into account the Steele opinion. Direct costs are incurred by the Return Preparer Office and include staffing and contract-related costs for activities, processes, and procedures related to administering the PTIN program. Staffing costs included in the PTIN user fee calculation relate to the compliance activities of investigating ghost preparers; handling complaints regarding the improper use of a PTIN, use of a compromised PTIN, or use of a PTIN obtained through identity theft; and composing the data to refer those specific types of complaints to other IRS business units. The PTIN user fee also takes into account indirect costs for support activities related to the provision of PTINs and maintenance of the PTIN database. In accordance with Steele, the PTIN user fee calculation does not take into account compliance costs other than those described in this paragraph, costs incurred by the Suitability Department, support costs other than those described in this paragraph, and costs previously conceded by the government in Steele, as detailed earlier in this preamble.

The salary and benefits for the work performed related to the PTIN program is projected to be $17,555,984 in total over FYs 2026 through 2028. In addition to salary and benefits and overhead expenses, the IRS projects incurring travel, training, and supplies costs of $63,579 in each of FYs 2026 through 2028. The total salary and benefits, travel, training, and supplies, and overhead expenses projected are shown below:

 

The total cost for FYs 2026 through 2028 is therefore projected to be $28,792,946. The number of users is based on FY 2024 numbers adjusted by a projected increase in applications in FYs 2026, 2027, and 2028. Dividing this total cost by the projected population of users for FYs 2026 through 2028 results in a cost per application or application for renewal of $10 as follows: $28,792,946 (total cost) ÷ 2,829,524 (number of applications) = $10.18 (cost per application or application for renewal).

Taking into account the full amount of these costs, the amount of the PTIN user fee per application or application for renewal is $10.

Costs related to a third-party contractor’s activities for the issuance, renewal, and maintenance of PTINs, such as processing applications and operating a call center, are included in the PTIN user fee calculation, in accordance with Steele. This amount is currently set at $8.75 per application or application for renewal. The third-party contractor was chosen through a competitive bidding process. The amount of the third-party contractor portion may change in 2026 when the contract expires and will be re-computed.

The principal author of these regulations is Jamie Song, Office of the Associate Chief Counsel (Procedure and Administration). Other personnel from the Treasury Department and the IRS participated in the development of the regulations.

Estate taxes, Excise taxes, Fees, Gift taxes, Income taxes, Reporting and recordkeeping requirements.

Accordingly, 26 CFR part 300 is amended as follows:

Paragraph 1. The authority citation for part 300 continues to read in part as follows:

Authority: 31 U.S.C. 9701.

Par. 2. Section 300.11 is amended by revising paragraphs (b) and (d) to read as follows:

§300.11 Fee for obtaining a preparer tax identification number.

* * * * *

(b) Fee. The fee to apply for or renew a preparer tax identification number is $10 per year and is in addition to the fee charged by the contractor.

* * * * *

(d) Applicability date. This section applies to applications for or renewal of a preparer tax identification number filed on or after September 30, 2025.

Edward T. Killen, Acting Chief Tax Compliance Officer.

Approved: September 15, 2025.

Kenneth J. Kies, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register September 29, 2025, 8:45 a.m., and published in the issue of the Federal Register for September 30, 2025, 90 FR 46762)

¹ The government previously conceded $26,576,661, $26,623,420, and $25,685,247 for amounts collected in FY 2011, FY 2012, and FY 2013, respectively, which related to certain communications, compliance, Office of Professional Responsibility (OPR), and operations support activities; $8,737,123 and $9,010,458 for amounts collected in FY 2014 and FY 2015, respectively, which related to certain communications, Office of the Director, Strategy and Finance, suitability, compliance and complaint referrals, competency and standards, continuing education, OPR, enrolled agent and enrolled retirement plan agent department, and contractor processing activities; and $6,904,345 and $6,784,762 for amounts collected in FY 2016 and FY 2017, respectively, which related to certain communications, Office of the Director, Strategy and Finance, suitability, compliance and complaint referrals, OPR, enrolled agent and enrolled retirement plan agent department, and contractor processing activities.

Interim final regulations in the Rules and Regulations section of this issue of the Federal Register amend regulations under 26 CFR part 300 setting a user fee for individuals who apply for or renew a PTIN. The Independent Offices Appropriation Act of 1952 (IOAA), which is codified at 31 U.S.C. 9701, authorizes agencies to prescribe regulations that establish user fees for services provided by the agency. The IOAA provides that regulations implementing user fees are subject to policies prescribed by the President; these policies are set forth in the Office of Management and Budget Circular A-25, 58 FR 38142 (July 15, 1993).

The text of the interim final regulations also serves as the text of these proposed regulations. The preamble to the interim final regulations explains the interim final regulations and these proposed regulations.

Consideration will be given to comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any comments submitted will be made available at https://www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register.

The principal author of these regulations is Jamie Song, Office of the Associate Chief Counsel (Procedure and Administration). Other personnel from the Treasury Department and the IRS participated in the development of the regulations.

Estate taxes, Excise taxes, Fees, Gift taxes, Income taxes, Reporting and recordkeeping requirements.

Accordingly, the Treasury Department and IRS propose to amend 26 CFR part 300 as follows:

Paragraph 1. The authority citation for part 300 continues to read as follows:

Authority: 31 U.S.C. 9701.

Par. 2. Section 300.11 is amended by revising paragraphs (b) and (d) to read as follows:

§300.11 Fee for obtaining a preparer tax identification number.

* * * * *

(b) [The text of proposed § 300.11(b) is the same as the text of § 300.11(b) in the interim final rule published elsewhere in this issue of the Federal Register].

* * * * *

(d) [The text of proposed § 300.11(d) is the same as the text of § 300.11(d) in the interim final rule published elsewhere in this issue of the Federal Register].

Edward T. Killen, Acting Chief Tax Compliance Officer.

(Filed by the Office of the Federal Register September 29, 2025, 8:45 a.m., and published in the issue of the Federal Register for September 30, 2025, 90 FR 46777)

This notice of proposed rulemaking contains proposed amendments that would add new regulations to the Income Tax Regulations (26 CFR part 1) under section 224 of the Internal Revenue Code (Code) related to the deduction for qualified tips. The proposed regulations are issued under the authority conferred by section 70201(h) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), which requires that, not later than 90 days after the date of the enactment of the OBBBA, the Secretary of the Treasury or the Secretary’s delegate (Secretary) publish a list of occupations that customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1) of the Code. The proposed regulations are also issued under the authority in section 224(d)(2)(C), which provides that “qualified tips” do not include any amount received by an individual unless such other requirements as may be established by the Secretary in regulations or other guidance are satisfied, and section 224(g) of the Code, which instructs the Secretary to prescribe such regulations or other guidance as may be necessary to prevent reclassification of income as qualified tips, including regulations or other guidance to prevent abuse of the deduction allowed by section 224. In addition, the proposed regulations are also issued under the authority of section 7805(a) of the Code, which authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Under section 61(a), amounts received by individuals as tips are included in gross income and subject to income tax. Treasury regulations under section 61 provide that “[w]ages, salaries...[and] tips... are income to the recipients unless excluded by law.” See § 1.61-2(a).¹

Section 63(a) defines taxable income as gross income minus allowable deductions (other than the standard deduction). Section 63(b) provides that, in the case of an individual who does not elect to itemize deductions for the taxable year, taxable income means adjusted gross income reduced by the standard deduction and certain other enumerated deductions.

Section 70201(a) of the OBBBA added new section 224 to the Code providing an income tax deduction for “qualified tips” that are received during the taxable year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. Section 70201(b) of the OBBBA added the deduction provided by section 224 to the list of deductions used to determine taxable income in section 63(b). Specifically, section 224(a) provides for a deduction in an amount equal to the qualified tips received by an individual in a taxable year that are included on statements² furnished to the individual pursuant to section 6041(d)(3), section 6041A(e)(3), section 6050W(f)(2), or section 6051(a)(18), or are reported by the taxpayer on Form 4137 (or successor). Section 224(b)(1) limits this deduction to an amount not to exceed $25,000 in a taxable year. Section 224(b)(2) further limits the amount of the deduction based on a taxpayer’s modified adjusted gross income, which is a taxpayer’s adjusted gross income for the taxable year increased by any amount excluded from gross income under section 911, section 931, or section 933. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Section 224(c) provides that, in the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips are taken into account under section 224(a) only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.

Section 224(d)(1) defines “qualified tips” as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. Section 224(d)(2) further requires that qualified tips not include any amount received by an individual unless the amount:

Section 224(d)(2) further provides that, for purposes of determining whether amounts received in the course of a trade or business is a specified trade or business as defined in section 199A(d)(2), in the case of an individual receiving tips in the trade or business of performing services as an employee, such individual is treated as receiving tips in the course of a trade or business which is a specified service trade or business if the trade or business of the employer is a specified service trade or business.

Section 224(d)(3) provides that for purposes of section 224(d)(1), the term “cash tips” includes tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.

Section 224(e) provides that no deduction is allowed under section 224 unless the taxpayer includes on the return of tax for the taxable year such individual’s Social Security number (SSN) as defined in section 24(h)(7) of the Code.

Section 224(f) provides that if the taxpayer is a married individual (within the meaning of section 7703), section 224 applies only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year. That is, the deduction is not available for a taxpayer who is married and files separately.

Section 224(h) provides that no deduction is allowed under section 224 for any taxable year beginning after December 31, 2028.

Section 70201(h) of the OBBBA instructs the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1) no later than 90 days after the date the OBBBA was enacted (July 4, 2025).

The Council of Economic Advisors (CEA) released a report in June 2025, entitled “The One Big Beautifull Bill: Legislation for Historic Prosperity and Deficit Reduction,” that estimates the economic effects and fiscal impacts of OBBBA. In this report CEA estimates that the no tax on tips provision of OBBBA will increase average take-home pay for tipped workers by $1,300 per year. CEA also estimates that the provisions for no tax on overtime, no tax on tips, and senior tax relief will boost Gross Domestic Product by 0.3 to 0.4 percent while they are in effect and the growth that they generate will yield $54 to $73 billion in higher revenue to offset the direct revenue losses attributable to these provisions.

1. Qualified tips

Section 224(d)(1) defines “qualified tips” as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. Consistent with section 224(d), the proposed regulations would define “qualified tips” as amounts received as cash tips by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, subject to certain limitations. The proposed regulations would define cash tips as tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are paid in a cash medium of exchange, including by cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash. Cash tips would not include items paid in any medium other than cash or charge, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets). For purposes of these proposed regulations, tips would be amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm’s length transaction. These definitions are consistent with IRS guidance defining tips for FICA and income tax withholding purposes in §§ 31.3121(a)(12)-1 and 31.3401(a)(16)-1, as well as other IRS guidance concerning tips in Notice 2023-13, 2023-9 I.R.B. 534, and Rev. Rul. 2012-18, 2012-26 I.R.B. 1032.

A. Payments must be voluntary

Section 224(d)(2)(A) provides that “qualified tips” must be paid voluntarily without any consequence in the event of nonpayment, must not be the subject of negotiation, and must be determined by the payor. In Revenue Ruling 2012-18, the IRS applied similar factors in distinguishing tips from non-tip wages, specifically service charges, for FICA and income tax withholding purposes. Revenue Ruling 2012-18 provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion, (2) the customer must have the unrestricted right to determine the amount, (3) the payment should not be the subject of negotiation or dictated by employer policy, and (4) generally, the customer has the right to determine who receives the payment. See also Ann. 2012-25, 2012-26 I.R.B. 1058; Rev. Rul. 59-252, 1059-2 C.B. 215. Example A in Revenue Ruling 2012-18 concludes that an 18% charge automatically added to a bill for a large party is a service charge and not a tip because it was dictated by the employer and was not paid free from compulsion. Consistent with both existing IRS guidance on tips and evolving practices concerning service charges, the proposed regulations would clarify that service charges, automatic gratuities, and other mandatory amounts automatically added to a customer’s bill by the vendor or establishment, are not qualified tips for purposes of section 224(d) unless the customer is expressly provided an option to disregard or modify it without consequence.

B. Special rules regarding a specified service trade or business

Section 224(d)(2)(B) provides that qualified tips do not include those received in the course of a trade or business that is a specified service trade or business (SSTB) as defined in section 199A(d)(2). Under section 199A(d)(2), an SSTB is defined as any trade or business (A) involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, 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 or owners, or (B) that involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).³ Treasury regulations in § 1.199A-5(b)(2) further define what it means to perform services in the fields listed in section 199A(d)(2)(A). For example, § 1.199A-5(b)(2)(vi) provides, in part, that the meaning of services performed in the performing arts means “the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.” The regulations further provide that, ‘[t]he performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts. . . . [or the] provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.” The proposed regulations would provide that an amount received by an individual in the course of an SSTB (as defined in section 199A(d)(2) and § 1.199A-5(b)) is not a qualified tip. The Treasury Department and the IRS request comments on the application of the existing rules under § 1.199A-5(b) to the SSTB definition in section 224. Specifically, comments are requested concerning whether the definitions in §1.199A-5(b) should be refined for section 224 purposes.

Consistent with the flush language in section 224(d)(2), the proposed regulations would also provide that tips received by an employee performing services for the employee’s employer in the course of a specified service trade or business operated by the employer are not qualified tips. The proposed regulations would clarify that this rule applies without regard to whether an owner of the trade or business is able to claim a section 199A deduction. For example, this rule applies if the employer is a corporation, even though corporations are not eligible for the deduction under section 199A.

The proposed regulations would also clarify that this rule applies even if the employee receiving tips in the course of working for an SSTB employer is working in an occupation that customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1) and is listed in proposed § 1.224-1(f). The proposed regulations would provide examples illustrating this rule.

C. Determining qualified tips for employees who participate in voluntary tip reporting programs with tip rates

Employees who enter into a Tipped Employee Participation Agreement as part of the Tip Rate Determination Agreement (TRDA) program or a Model Gaming Employee Tip Reporting Agreement as part of the Gaming Industry Tip Compliance Agreement (GITCA) program agree to report tips to their employer at or above the tip rate established by their employer for their occupational category. In exchange for the employees’ voluntary agreement to report tips at this agreed upon rate, the IRS provides tip examination protection to the employees for the taxable years in which their agreements were in effect. The proposed regulations would clarify that “qualified tips” include tips reported pursuant to an agreement under the TRDA or GITCA program provided that the participating employee in the TRDA or GITCA program is otherwise eligible for the deduction under section 224, and reports tips using the tip rates established under their agreement. Additionally, the proposed regulations would clarify that an employee participating in the TRDA or GITCA program may report additional qualified tips to the IRS on the Form 4137.

D. Other requirements

Section 224(d)(2) provides that the term “qualified tips” does not include amounts received by an individual unless such other requirements as may be established by the Secretary in regulations or other guidance are satisfied. The proposed regulations would provide that amounts received for services the performance of which is a felony or misdemeanor under applicable law are not qualified tips. In addition, the proposed regulations would provide that amounts received for prostitution services and pornographic activity are not qualified tips. Finally, to prevent reclassification of income as qualified tips, and to prevent abuse of the deduction, the proposed regulations would also provide that a payment is not a qualified tip if the tip recipient has an ownership interest in or is employed by the payor of the tip.

2. Trade or business limitations

Section 224(c) imposes a limitation on a taxpayer who receives tips in the course of a trade or business (other than the trade or business of performing services as an employee). The proposed regulations would restate the statutory limit, which is the difference between the gross income from the taxpayer’s trade or business for the taxable year minus the sum of deductions (other than the deduction for qualified tips) for that trade or business for the taxable year. The proposed regulations would clarify that the deduction allowed for qualified tips is not taken into account for this purpose because it is not a deduction associated with a trade or business.

3. Social Security numbers and married individuals

The proposed regulations would clarify that a taxpayer must include on the tax return for the taxable year the SSN, within the meaning of section 24(h)(7), of the individual who has received the tips. The proposed regulations would also restate the statutory requirement that a taxpayer who is married, within the meaning of section 7703, must file a joint return with the taxpayer’s spouse to claim the deduction allowed by section 224. The proposed regulations would further clarify that married taxpayers are only required to include the SSN of the taxpayer who has received the qualified tips to claim the deduction, and that an SSN is required of both taxpayers only when both have qualified tips for which they are claiming a deduction.

The proposed regulations would also clarify that the total amount of qualified tips that can be deducted on a return per calendar year is $25,000 regardless of filing status. After applying the $25,000 limitation, the proposed regulations would provide that the amount is subject to the phase-out based on the taxpayers’ modified adjusted gross income described in section 224(b)(2).

4. Occupations that customarily and regularly received tips on or before December 31, 2024

Under section 224(d)(1), “qualified tips” are cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. In addition, section 70201(h) of the OBBBA instructs the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024, for purposes of section 224(d)(1).

A. Methodology

The Treasury Department and the IRS drafted the proposed list of occupations that customarily and regularly received tips based on a review of IRS data, legislative history, and survey data regarding tipped occupations and the presence of certain factors demonstrating that those occupations customarily and regularly received tips. Because the Code does not define the phrase “customarily and regularly” regarding tips,⁴ the Treasury Department and the IRS looked to dictionary definitions and other statutory provisions for guidance. The Oxford English dictionary defines the term “customarily” as “[i]n a way that follows customs or usual practices; according to custom; usually; habitually.”⁵ It defines “regularly” as “in conformity to a general rule or established principle; in a steady, predictable, or uniform manner; at fixed times or uniform intervals; repeatedly, without interruption; frequently, often.”⁶

The Fair Labor Standards Act (FLSA) uses the phrase “customarily and regularly” in relation to the FLSA tip credit.⁷ The FLSA defines a “tipped employee” for whom an employer may take a tip credit as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. 203(t). The FLSA further provides that when an employer takes an FLSA tip credit for a tipped employee, the tipped employee must retain all of the tips the employee receives, except that this requirement “shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.” 29 U.S.C. 203(m)(2)(A).⁸ United States Department of Labor (DOL) regulations provide, in part, that “[t]he phrase ‘customarily and regularly’ signifies a frequency which must be greater than occasional, but which may be less than constant.” 29. CFR 531.57.⁹ DOL guidance also addresses specific occupations in which employees customarily and regularly receive tips within the meaning of the FLSA. For instance, DOL guidance interpreting the FLSA states that servers, counter personnel who serve customers, bellhops, bussers (that is, server helpers), and service bartenders are examples of occupations that “customarily and regularly receive tips” for purposes of the FLSA.¹⁰ In guidance, and in opinion letters based on specific factual scenarios presented, DOL’s Wage and Hour Division (WHD) has looked to the FLSA’s statutory text, its legislative history, and the extent to which employees in the occupation interact with customers to determine whether an employee customarily and regularly receives tips for purposes of the FLSA. Courts similarly have considered whether an employee is in an occupation that customarily and regularly receives tips for purposes of the FLSA.¹¹ Based on these definitions and the guidance under the FLSA, the Treasury Department and the IRS determined that individuals must have received cash tips more often than occasionally (for example, not only on annual holidays or other celebrations) during a calendar year ending on or before December 31, 2024, in order for the occupation to be an occupation that customarily and regularly received tips on or before December 31, 2024.

With these parameters in mind, the Treasury Department and the IRS reviewed data collected from 2023 Forms W-2, Wage and Tax Statement,¹² and Forms 4137, Social Security and Medicare Tax on Unreported Tip Income, and corresponding income tax returns (Forms 1040) that reported tips in box 7 of Form W-2 (Social Security tips) or on Line 4 of an attached Form 4137. The Treasury Department and the IRS identified occupations listed on income tax returns (as reported on page 2 of Form 1040 next to the taxpayer’s signature) as having customarily and regularly received tips, based on the percentage of wage earners who reported a given occupation in the tax return data and also reported at least $100 in annual tipped income.

The Treasury Department and the IRS next determined that the data was subject to limitations that resulted in under-inclusion because the data was limited to the tax return data of individuals who reported tips to employers and received a Form W-2 or who filed Form 4137. Individuals working in certain occupations, such as rideshare drivers, receive tips but may operate as independent contractors rather than employees, and therefore do not receive a Form W-2 reporting tips, nor do they separately report their tip income for income tax purposes.¹³ Because tips were not separately reported on Forms 1099-NEC, Nonemployee Compensation, 1099-MISC, Miscellaneous Information, or 1099-K, Payment Card and Third Party Network Transactions, certain occupations that received tips were not reflected in the income tax return data. In addition, the Treasury Department and IRS determined that the data may have been overinclusive due to variations in how taxpayers chose to write their occupation on Form 1040. For example, the self-reported occupation may have typographical errors or abbreviations, or taxpayers may have written multiple occupations on their Form 1040, separated by a comma or a slash mark (like “Occupation 1/Occupation 2”).¹⁴ These variations in how taxpayers reported their occupation on Form 1040 made it difficult for the data analysis to capture all taxpayers with a given occupation (in the sense of what job they actually performed, rather than what they wrote on the Form 1040) together. This was particularly problematic for certain occupations that had more variations in how they were reported (for example, server, waitstaff, waitress, waiter).

To account for these limitations, the Treasury Department and the IRS examined occupations identified in the GITCA program, a voluntary tip reporting program for the gaming industry run by the IRS, and other similar IRS tip reporting programs as occupations that received tips on or before December 31, 2024. See Rev. Proc. 2007-32, 2007-22 I.R.B. 1322.¹⁵ The IRS has been collecting tip data through its GITCA program (and other voluntary tip reporting programs) for over 20 years. The GITCA program requires participating employers to provide annual reports to the IRS that contain information regarding employees’ occupational categories, shifts, and outlets; gross receipts subject to food and beverage tipping; and aggregated receipts showing charged tips and reported tips. The occupations identified as having customarily and regularly received tips based on the GITCA data were largely consistent with those identified by the confidential tax return data.

The Treasury Department and the IRS also consulted the House Budget Committee report on the OBBBA, H. Rept. 119-106, at 1502 (2025), for additional information regarding occupations that traditionally and customarily received tips on or before December 31, 2024. In the explanation of the deduction for qualified tips under section 224, the report describes occupations that traditionally and customarily received tips on or before December 31, 2024, as including, but not limited to, restaurant servers, bartenders, taxi drivers, rideshare drivers, food delivery drivers, hairdressers, hairstylists, hotel bellhops, hotel housekeepers, and casino dealers.¹⁶ To the extent those occupations were not already captured by the IRS data, they were added to the list.

Finally, the Treasury Department and the IRS examined survey data from the Panel Study of Income Dynamics that included information on occupations and tip income of both employees and self-employed individuals. The Panel Study of Income Dynamics is a nationally representative survey conducted by the University of Michigan. It includes questions about the occupation of, and tip income received by, the reference person and the person’s spouse (if they are married). The Treasury Department and the IRS consulted data from surveys conducted in years 2017, 2019, and 2023 (surveys which inquired about tips received in 2016, 2018, and 2022, respectively), which is the most recent data available (except for 2021, which was avoided due to any potential abnormalities related to the COVID-19 pandemic). The occupations identified as having customarily and regularly received tips based on this survey data were largely consistent with those identified by the confidential tax return data.

While reviewing the data, the Treasury Department and the IRS recognized that the occupations identified as having customarily and regularly received tips on or before December 31, 2024, were in service industries, and the individuals working in the occupations either interacted with the customers for whom they were providing a service or, commonly participated in tip-sharing arrangements with individuals who interacted with customers.

In defining “cash tips,” section 224(d)(3) “includes tips received from customers ..., and, in the case of an employee, tips received under any tip-sharing arrangement.” The Treasury Department and the IRS considered the language in section 224(d)(3) to indicate that, for purposes of the deduction for qualified tips under section 224, there is no distinction between employees in occupations receiving tips directly from customers and employees in occupations receiving tips through tip-sharing arrangements with other employees that interact with customers. While certain employees in tip-sharing arrangements may not have extensive, or any, customer interaction, they do assist employees who do interact with customers or otherwise contribute to the overall customer experience. For this reason, the Treasury Department and the IRS have proposed that certain occupations that may not involve direct interactions with customers should still be considered occupations that customarily and regularly received tips if employees in such occupations participated in tip-sharing arrangements such as tip pooling or tip-outs with employees who do interact with customers. For example, dishwashers reported receiving sufficient tips to appear in the IRS data and, even though they do not typically interact with customers, they may sometimes participate in tip-sharing arrangements with employees who do interact with customers (for example, waitstaff). Accordingly, dishwashers are included in the proposed list of occupations that customarily and regularly received tips for purposes of section 224.

The Treasury Department and the IRS recognize that courts and DOL have interpreted the FLSA standard for customarily and regularly somewhat differently, but this interpretation is due to differences in the specific language, purpose, and history of the FLSA tip credit and mandatory tip-sharing arrangement provisions. For instance, the FLSA provides that when an employer takes a tip credit, the employer may only require “the pooling of tips among employees who customarily and regularly receive tips.” 29 USC 203(m)(2)(A). This presumes that the employee has some level of interaction with customers to “customarily and regularly” receive tips under the FLSA.¹⁷ In contrast, section 224(d)(3) specifically defines “cash tips” to include both tips received from customers and, in the case of an employee, tips received under any tip-sharing arrangement.

After compiling the list of occupations that customarily and regularly received tips, the Treasury Department and the IRS compared the proposed list of occupations that customarily and regularly received tips for purposes of section 224 to occupations contained in the 2018 Standard Occupation Classification (SOC) code. The SOC Code system is published by the Executive Office of the President, Office of Management and Budget (OMB). The SOC Code system is a Federal statistical standard used by Federal agencies to classify workers into occupational categories for the purpose of collecting, calculating, or disseminating data.¹⁸ The SOC Code system classifies paid work or work for profit into occupational categories based on the work performed. All workers are classified into one of 867 detailed occupations according to their occupational definition.¹⁹ To facilitate classification, detailed occupations are combined to form 459 broad occupations, 98 minor groups, and 23 major groups.²⁰ Detailed occupations in the SOC with similar job duties, and in some cases skills, education, and/or training, are grouped together. The Treasury Department and the IRS focused on the detailed occupations in the SOC Code system. However, in the process of compiling this list, the Treasury Department and the IRS determined that several of the detailed SOC codes included, in the same detailed SOC code, some occupations that customarily and regularly received tips on or before December 31, 2024, and other occupations that did not.²¹

To address the issue of the over-inclusivity of certain SOC codes, the Treasury Department and the IRS created a new categorization system. The descriptions and illustrative examples for the occupation codes in this new system often mirror their SOC code counterparts. However, in situations where the SOC code was overly inclusive, the new system provides an occupation code, description, and illustrative examples that only encompass occupations that customarily and regularly received tips on or before December 31, 2024.

In addition, in certain situations where multiple detailed SOC codes described occupations that had similar titles, the new system provides an occupation code, description, and illustrative examples that stem from multiple detailed SOC codes. For example, detailed SOC codes for a variety of chefs and cooks were aggregated in the new system into a single occupation code.

Lastly, in certain situations, some detailed SOC codes were split into multiple occupation codes under the new system. For example, chauffeurs were moved from the SOC occupation “Shuttle Drivers and Chauffeurs” to the “Taxi Driver” occupation, thus creating under the new system two occupations: “Taxi and Rideshare Drivers and Chauffeurs” and “Shuttle Drivers.”

B. List of occupations that customarily and regularly received tips on or before December 31, 2024.

The proposed regulations would include the list of occupations that customarily and regularly received tips on or before December 31, 2024 (List of Occupations that Receive Tips), that was compiled based on the methodology described in this preamble. In accordance with statutory language in section 224(d)(1), the proposed regulations would provide that only occupations included in the List of Occupations that Receive Tips are eligible for the deduction in section 224(a).

This List of Occupations that Receive Tips would be organized according to the new categorization system created by the Treasury Department and the IRS specifically for this purpose, as described in this preamble. The specific occupations in the List of Occupations that Receive Tips, each assigned a three-digit code called a “Treasury Tipped Occupation Code” or “TTOC” would be grouped together in the following more general occupational categories:

100s – Beverage and Food Service

200s – Entertainment and Events

300s – Hospitality and Guest Services

400s – Home Services

500s – Personal Services

600s – Personal Appearance and Wellness

700s – Recreation and Instruction

800s – Transportation and Delivery

The List of Occupations that Receive Tips also provides the “TTOC Occupation Title” for each occupation code, a short description of the types of services performed by individuals working in an occupation included in this occupation code, illustrative examples of specific occupations that would be included under the occupation code, and the related SOC System Code(s).

These regulations are proposed to apply for taxable years beginning after December 31, 2024. Taxpayers may rely on these proposed regulations for taxable years beginning after December 31, 2024, and on or before the date these regulations are published as final regulations in the Federal Register, provided that taxpayers follow these proposed regulations in their entirety and in a consistent manner.

Before these proposed regulations are adopted as final regulations, consideration will be given to comments regarding the notice of proposed rulemaking that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. In particular, the Treasury Department and IRS request comments on the application of the existing rules under § 1.199A-5(b) to the SSTB definition in section 224, and whether the definitions in § 1.199A-5(b) should be refined to better align with the anti-abuse provision in section 224 and the congressional directive for the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024. Additionally, Treasury and the IRS are concerned that taxpayers might misclassify income as tips and request comments on how to address this issue in the final regulations. All comments will be made available at https://www.regulations.gov. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.

A public hearing has been scheduled for October 23, 2025, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants may alternatively attend the public hearing by telephone.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by October 22, 2025. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by October 22, 2025, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register.

Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG-110032-25 and the language TESTIFY In Person. For example, the subject line may say: Request to TESTIFY in Person at Hearing for REG-110032-25.

Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-110032-25 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG-110032-25.

Individuals who want to attend the public hearing in person without testifying must also send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG-110032-25 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing In Person for REG-110032-25. Requests to attend the public hearing must be received by 5:00 p.m. ET on October 21, 2025.

Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-110032-25 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG-110032-25. Requests to attend the public hearing must be received by 5:00 p.m. ET on October 21, 2025.

Hearings will be made accessible to people with disabilities. To request special assistance during a hearing please contact the Publications and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not a toll-free number) by October 20, 2025.

The principal author of these proposed regulations is the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations and Employment Taxes). However, other personnel from the IRS and the Treasury Department participated in their development.

Income taxes, Reporting and recordkeeping requirements.

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

Paragraph 1. The authority citation for part 1 is amended by adding an entry for § 1.224-1 in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

* * * * *

§ 1.224-1 also issued under 26 U.S.C. 224(d)(2)(C) and (g) and sec. 70201(h) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act.

* * * * *

Par. 2. Section 1.224-1 is added to read as follows:

§ 1.224-1 Qualified tips.

(a) In general. Under section 224(a) of the Internal Revenue Code (Code), there shall be allowed a deduction under section 63(b) for an amount equal to the qualified tips received by an individual during the taxable year that are included separately on statements furnished to the individual pursuant to section 6041(d)(3), section 6041A(e)(3), section 6050W(f)(2), or section 6051(a)(18) of the Code, or reported by the taxpayer on Form 4137, Social Security and Medicare Tax On Unreported Tip Income (or successor).

(b) Deduction limitations—(1) In general. The amount allowed as a deduction under section 224(a) and paragraph (a) of this section for any taxable year shall not exceed $25,000, regardless of filing status.

(2) Limitation based on adjusted gross income. After the application of the limitation in paragraph (b)(1) of this section, the amount allowable as a deduction under section 224(a) and paragraph (a) of this section shall be further reduced (but not below zero) by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return). For purposes of this paragraph (b)(2), modified adjusted gross income means the adjusted gross income of the taxpayer from the taxable year increased by any amount excluded from gross income under section 911, section 931, or section 933.

(3) Examples. The following examples illustrate the rules of paragraphs (b)(1) and (2) of this section.

(4) Example 1. Employee A satisfies all the requirements under section 224 and Employee A’s filing status for 2025 is single. A received $26,000 in qualified tips in 2025. Since this is greater than the $25,000 limitation in paragraph (b)(1) of this section, the $26,000 qualified tip amount is first reduced from $26,000 to $25,000. A’s modified adjusted gross income for 2025 is $200,000. The qualified tip amount is further reduced (but not below zero) by $100 for each $1,000 by which A’s modified adjusted gross income exceeds $150,000 (the threshold for a single filer). A’s modified adjusted gross income exceeds $150,000 by $50,000. To calculate the deduction, A first divides $50,000 by $1,000 to get 50. Thus, A’s deduction under section 224(b)(2) is further reduced by $5,000 ($100 x 50), from $25,000 to $20,000.

(5) Example 2. Employee K satisfies all the requirements under section 224 and Employee K’s filing status for 2025 is single. K received $10,000 in qualified tips in 2025. Since this amount is less than $25,000, the limitation in paragraph (b)(1) of this section does not apply. K’s modified adjusted gross income for 2025 is $180,000. K’s deduction is reduced (but not below zero) by $100 for each $1,000 by which K’s modified adjusted gross income exceeds $150,000 (the threshold for a single filer). K’s modified adjusted gross income exceeds $150,000 by $30,000. To calculate the deduction, K first divides $30,000 by $1,000 to get 30. Thus, K’s deduction under section 224(b)(2) is reduced by $3,000 ($100 x 30), from $10,000 to $7,000.

(c) Qualified tips defined—(1) In general. Subject to the requirements in paragraph (c)(3) of this section, qualified tips are amounts received as cash tips (as defined in paragraph (c)(2) of this section) by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided in paragraph (f) of this section.

(2) Cash tips defined. For purposes of paragraph (c)(1) of this section, cash tips are tips received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool, that are paid in a cash medium of exchange, including by cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash. Cash tips do not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets). For purposes of this paragraph (c)(2), tips are amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm’s-length transaction.

(3) Amounts must be paid voluntarily. Amounts are qualified tips only if they are paid voluntarily and without any consequence in the event of nonpayment, are not the subject of negotiation, and are determined by the payor. Qualified tips must be paid without compulsion. Thus, service charges, automatic gratuities and any other mandatory amounts automatically added to a customer’s bill by the vendor or establishment are not qualified tips, even if the amounts are subsequently distributed to employees. If a customer is expressly provided an option to disregard or modify amounts added to a bill, such amounts are not mandatory amounts.

(i) Examples. The following examples illustrate the rules of this paragraph (c)(3). Unless otherwise indicated, each example assumes that other requirements for claiming the deduction under section 224 are satisfied.

(ii) Example 1. Restaurant W’s menu specifies that an automatic 18% charge will be added to all bills for parties of six or more customers. Customer D’s bill for food and beverages for her party of six includes the 18% charge on the “tip line” and the total bill includes this amount. Restaurant W distributes this amount to the waitstaff and bussers. Customer D did not determine the amount of the additional charge, nor was Customer D expressly provided an option to disregard or modify the amount. Customer D did not make the payment free from compulsion. Under these circumstances, the 18% charge is not a qualified tip for purposes of the deduction under section 224.

(iii) Example 2. The facts are the same as in paragraph (c)(3)(ii) of this section (Example 1) except the bill has a line labeled “additional tip amount.” In this case, Customer D adds on the “additional tip line” an amount equal to 2% of the price for food and beverages. As in paragraph (c)(3)(ii) of this section (Example 1), the 18% charge is not a qualified tip for the purposes of the deduction under section 224. However, the 2% additional amount is a qualified tip for the purposes of the deduction under section 224, because Customer D voluntarily paid the 2% additional amount without compulsion.

(iv) Example 3. Customer E dines at Restaurant X with a party of eight people. E’s bill for food and beverages for the party of eight includes a “recommended tip” equal to 18% of the price for food and beverages. However, there is a line for the customer to subtract (including to zero) or add to the recommended tip amount before paying the bill. Customer E subtracts 3% from the recommended tip amount resulting in a tip of 15% of the price for food and beverages. Customer E had a right to determine the additional amount, and he was expressly provided the option to disregard or modify the “recommended tip” amount. Under these circumstances, the recommended 18% amount is not a service charge. Rather, the 15% amount that the customer voluntarily paid without compulsion is a qualified tip for purposes of the deduction under section 224.

(v) Example 4. Customer F has a meal at Restaurant Y. The server presents the bill for the meal to Customer F on an electronic handheld point of sale (POS) device. The POS device includes the charges for each food and beverage item and the applicable tax. The POS device also prompts Customer F to leave a tip and provides the following options for Customer F: 15%, 18%, 20%, other, and no tip. Customer F selects 18% and pays the total balance via credit card through the POS device. Customer F had a right to determine the additional amount, and Customer F was expressly provided the option to leave no tip. Under these circumstances, the 18% amount is a qualified tip.

(vi) Example 5. The facts are the same as in paragraph (c)(3)(v) of this section (Example 4), but the choices on the POS device are 15%, 18%, and 20%. Customer F must select a “tip amount” before paying the bill. Customer F selects 15% and pays the total balance via credit card through the POS device. Customer F did not voluntarily determine the amount of the additional charge because Customer F was forced to select an amount greater than zero. Customer D was not expressly provided an option to disregard or modify the amounts presented. Customer D did not make the payment free from compulsion. Under these circumstances, the 15% charge is not a qualified tip for purposes of the deduction under section 224.

(vii) Example 6. The facts are the same as in paragraph (c)(3)(vi) of this section (Example 5), but Customer F selects 18% and pays the total balance via credit card through the POS device. Customer F did not voluntarily determine the lowest required amount (15%) of the additional charge because Customer F was forced to select an amount greater than zero. Customer F was not expressly provided an option to disregard or modify the amounts presented. Customer F did not make the payment of 15% free from compulsion. Under these circumstances, 15% of the charge is not a qualified tip for purposes of the deduction under section 224. However, the 3% additional amount is a qualified tip for the purposes of the deduction under section 224, because Customer F voluntarily, without compulsion, paid the 3% additional amount.

(viii) Example 7. Self-employed painter G is hired by customer Z to paint customer Z’s house. Included in the service contract between painter G and customer Z is a provision adding a 15% service charge to the total cost of the final bill. After the service contract is signed by both painter G and customer Z, painter G completes the painting services. After the painting services are completed, customer Z pays the amount agreed upon in the service contract, including the 15% service charge. In addition, customer Z pays painter G a cash tip amount, not provided for in the service agreement, equal to 10% of the final bill. The 15% service charge is not a qualified tip because it was included in the service contract before the painting services were provided and painter G’s performance of the painting services was conditioned on the agreement to pay the 15% service charge. However, because the 10% cash tip amount was not included in the service agreement, and because customer Z voluntarily paid the 10% cash tip amount without compulsion, the 10% cash tip amount is a qualified tip for purposes of the deduction under section 224.

(ix) Example 8. Shuttle Driver S enters into a contract with Customer Q. Under the terms of the contract, Shuttle Driver S will drive Customer Q to the airport for either $60 (consisting of a $50 charge and a 20% gratuity) or $65 (consisting of just the charge for the service with no gratuity). The contract states that an additional tip based on the service provided is welcome. Customer Q selects the first option and pays Shuttle Driver S $60. After arriving at the airport, Customer Q pays Shuttle Driver S an additional $5. The 20% gratuity is not a qualified tip because it was not paid voluntarily, and not providing the 20% gratuity would have resulted in Customer Q paying a higher amount. However, the additional $5 amount added after the service was completed is made without compulsion and is a qualified tip for purposes of this section.

(x) Example 9. Landscaper L is self-employed and enters into a contract to install a new patio for Customer O for $5,000. When the services are complete, Customer O pays Landscaper L $5,100, and tells Landscaper L that the additional $100 is a tip for L’s services. Landscaper L records the payment on the business’s books as a charge for $4,500 for installation of the patio and $600 as a tip. The amount of the qualified tip is $100 because this is the amount that was determined by the payor (the customer). The additional $500 is not a qualified tip because it was not paid voluntarily and was not designated by the payor (the customer). Amounts reclassified by the service provider from the agreed contract price are not qualified tips but are instead part of the charge for services. The additional $500 also is not a tip because it is not in excess of the amount that was agreed to be paid for L’s services.

(4) Special rules regarding a specified service trade or business. An amount received by an individual in the course of a specified service trade or business (as defined in section 199A(d)(2) of the Code) is not a qualified tip. If the individual performs services as an employee, the relevant trade or business is the trade or business of the employer in the course of which the employee is performing services. Thus, an amount received by an employee performing services for the employee’s employer in the course of a specified service trade or business operated by the employee’s employer is not a qualified tip, regardless of whether the trade or business or an owner of the trade or business is eligible for a deduction under section 199A, and regardless of whether the employee is performing services in an occupation listed in paragraph (f) of this section or whether that occupation is a specified service trade or business.

(i) Examples. The following examples illustrate the rules of this paragraph (c)(4). Unless otherwise indicated, each example assumes that other requirements for claiming the deduction under section 224 are satisfied.

(ii) Example 1. Self-employed Comedian C performs a stand-up comedy routine at Performance Venue V. The audience members at Performance Venue V give Comedian C cash tips after the performance. The cash tips received by Comedian C are not qualified tips because the tips are received in the course of Comedian C’s trade or business in the performing arts, which is a specified service trade or business. Such cash tips are not qualified tips notwithstanding the fact that Comedian C’s occupation (comedian) is included in the Treasury Tipped Occupation Code (TTOC) category of “Entertainers and performers,” on the list of occupations that customarily and regularly received tips on or before December 31, 2024, as provided in paragraph (f) of this section.

(iii) Example 2. Pianist P is an employee of Hotel H. Hotel H does not operate a trade or business that is a specified service trade or business. Pianist P plays the piano in the lobby of Hotel H. Hotel H’s patrons often leave cash tips in a jar on the piano for Pianist P. The cash tips received by Pianist P are qualified tips, even though the tips are received for services in the performing arts, which is a specified service trade or business, because Pianist P is performing services as an employee, the employer (Hotel H) is not operating a specified service trade or business, and Pianist P’s occupation (piano player) is included in the TTOC category of “Musicians and singers,” on the list of occupations that customarily and regularly received tips on or before December 31, 2024, as provided in paragraph (f) of this section.

(iv) Example 3. Bartender B is an employee of Company R. Company R does not operate a trade or business that is a specified service trade or business. Theater T enters into a contract with Company R to provide bartending services during the intermission of certain live performances occurring at Theater T. During the intermissions, Bartender B receives cash tips from patrons at Theater T. The cash tips are qualified tips because Bartender B is performing services as an employee, the employer (Company R) is not engaged in a specified service trade or business, and the employee’s occupation (bartender) is included in the TTOC category of “Bartenders” on the list of occupations that customarily and regularly received tips on or before December 31, 2024, as provided in paragraph (f) of this section.

(5) Employees participating in voluntary tip reporting programs with tip rates. Employees who enter into a Tipped Employee Participation Agreement as part of the Tip Reporting Determination Agreement (TRDA) program or a Model Gaming Employee Tip Reporting Agreement as part of the Gaming Industry Tip Compliance Agreement (GITCA) program may determine the amount of qualified tips using the applicable tip rate in their agreement (and amounts reported on Form 4137 (or successor)) in lieu of reporting actual tips received. The use of the TRDA or GITCA program to determine qualified tips for purposes of this section will not affect the tip audit protection otherwise applicable to the employee’s agreement. Employees participating in the TRDA or GITCA program remain subject to all remaining requirements in section 224 and this section regarding eligibility for the deduction.

(6) Illegal activity. Any amount received for a service the performance of which is a felony or misdemeanor under applicable law is not a qualified tip.

(7) Prostitution. Any amount received for prostitution services is not a qualified tip.

(8) Pornography. Any amount received for pornographic activity is not a qualified tip.

(9) No ownership in or employment by payor. A tip received by an employee or other service provider who has an ownership interest in or is employed by the payor of the tip is not a qualified tip.

(d) Trade or business limitations for tips received in course of trade or business—(1) In general. In the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than a trade or business of performing services as an employee) of such individual, such qualified tips shall be deducted only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions (other than the deduction allowed for qualified tips) allocable to the trade or business in which such qualified tips are received by the individual for the taxable year. The deduction allowed for qualified tips is not taken into account for this purpose because it is not a trade or business deduction. Thus, generally, for self-employed taxpayers, the deduction under section 224 for a trade or business is limited to the individual’s net income (without regard to the section 224 deduction) from that trade or business.

(2) Examples. The following examples illustrate the rule of paragraph (d)(1) of this section.

(3) Example 1. Manicurist M is self-employed and owns a nail salon. Manicurist M has no other employment. For the taxable year, Manicurist M has gross income of $100,000 that consists of $70,000 of fees for services at the nail salon and $30,000 of qualified tips. Manicurist M’s total deductible expenses (other than the deduction for qualified tips) are $40,000. Manicurist M’s gross income of $100,000 from the trade or business exceeds the sum of the deductions for that trade or business (other than qualified tips) by $60,000 ($100,000 - $40,000 = $60,000). Because the maximum deduction under section 224 and paragraph (b)(1) of this section is $25,000, Manicurist M is permitted to deduct $25,000.

(4) Example 2. Manicurist M is self-employed and owns a nail salon. Manicurist M has no other employment. For the taxable year, Manicurist M has gross income of $75,000 that consists of $55,000 of fees for services at the nail salon and $20,000 of qualified tips. Manicurist M’s total deductible expenses (other than the deduction for qualified tips) are $60,000. Manicurists M’s gross income of $75,000 from the trade or business exceeds the sum of the deductions from that trade or business by $15,000 ($75,000 - $60,000 = $15,000). Although Manicurist M received $20,000 in qualified tips, Manicurist M is allowed a qualified tip deduction of only $15,000, which is the extent to which Manicurist M’s gross income from the trade or business ($75,000) exceeds the total deductible expenses (other than qualified tips) ($60,000) from that trade or business.

(e) Social Security numbers and married individuals—(1) In general. To claim a deduction under section 224, a taxpayer must include on the taxpayer’s tax return the Social Security number (SSN), as defined in section 24(h)(7) of the Code, of the individual who has received the qualified tips.

(2) Married taxpayers. Taxpayers who are married, as defined by section 7703 of the Code, must file a joint return to claim the deduction allowed by section 224. However, to claim the deduction allowed by section 224, married taxpayers are required to include only the SSN of the taxpayer who has received the tips to claim the deduction, and an SSN is required of both taxpayers only when both have qualified tips for which the deduction is being claimed. In accordance with section 224(b)(1), the total amount of qualified tips that can be deducted per calendar year is $25,000 regardless of filing status. After applying the $25,000 limitation, the deduction amount is further subject to the phase-out based on the taxpayers’ modified adjusted gross income described in section 224(b)(2).

(3) Example. Taxpayers J and K are married, as defined in section 7703, and they file a joint income tax return. They both work in occupations that customarily and regularly received tips on or before December 31, 2024. J receives $15,000 in qualified tips in 2025, and K receives $20,000 in qualified tips in 2025. The maximum deduction J and K may claim pursuant to section 224 on their joint return for 2025 is $25,000.

(f) Occupations that customarily and regularly received tips on or before December 31, 2024 — (1) In general. The occupations in Table 1 customarily and regularly received tips on or before December 31, 2024. Subject to the requirements in section 224 and this section, only qualified tips received in connection with the occupations listed in Table 1 are eligible for the deduction in section 224(a).

(2) Specified service trade or business exclusion. An individual working in an occupation listed in Table 1 is not eligible for the deduction in section 224(a) with respect to any amounts received in the course of a trade or business that is a specified service trade or business. An individual engaged in the trade or business of being an employee is not eligible for the deduction in section 224(a) with respect to any amounts received for providing services for an employer in the course of a trade or business of the employer that is a specified service trade or business.

 

1. “Related Standard Occupational Classification (SOC) System Code(s)” are the code(s) from the 2018 Standard Occupational Classification System, as published by the Executive Office of the President, Office of Management and Budget, that most closely correlate(s) to the Treasury Tipped Occupation Code (TTOC).

(g) Termination. No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028.

(h) Applicability date. This section applies to taxable years beginning after December 31, 2024.

Edward T. Killen, Acting Chief Tax Compliance Officer.

(Filed by the Office of the Federal Register September 19, 2025, 8:45 a.m., and published in the issue of the Federal Register for September 22, 2025, 90 FR 45340)

¹ Under section 3121(q), tips are also considered wages for Federal Insurance Contributions Act (FICA) purposes. However, the deduction under section 224 does not apply for FICA purposes and is not taken into account in determining wages subject to FICA tax. Similarly, the deduction under section 224 does not apply for Self-Employment Contributions Act (SECA) purposes and is not taken into account for purposes of determining net earnings subject to SECA tax.

² The House Budget Committee report on the OBBBA, H. Rept. 119-106, at 1503 (2025), specifies that the qualified tip amounts included on reporting statements (for example, Form 1099) must be separately accounted for on the statements.

³ Section 199A(d)(2) cross references the qualified trade or business definition in section 1202(e)(3)(A), with certain modifications.

⁴ The Code does use the term “customarily” in section 6053(c)(3). Section 6053(c)(3) requires large food or beverage establishments to allocate tips among “employees performing services during any payroll period who customarily receive tip income.” Section 6053(c)(4) defines the term “large food or beverage establishment” as a trade or business “with respect to which the tipping of employees serving food or beverages by customers is customary.” Regulations under section 6053(c) provide further guidance concerning the term “customary.” Section 31.6053-3(j)(6) excludes “fast food” operation from the definition of “food or beverage operation.” Section 31.6053-3(j)(7) provides that, for purposes of defining “large food or beverage establishments,” tipping would not be considered customary for a cafeteria style operation or for a food or beverage operation where at least 95% of its total sales are nonallocable receipts (defined as carryout sales and sales with service charges). A “cafeteria style operation” is defined in § 31.6053-3(j)(18) as a food or beverage operation which is primarily self-service and in which the total cost of food or beverages selected by a customer is paid prior to the customer’s being seated or is stated on a check provided to the customer prior to the customer’s being seated and is paid by the customer to a cashier.

⁵ Oxford University Press. (n.d.). Customarily, adv. In Oxford English dictionary. Retrieved July 31, 2025, from https://doi.org/10.1093/OED/1071895970.

⁶ Oxford University Press. (n.d.). Regularly, adv., 1.a. In Oxford English dictionary. Retrieved July 31, 2025, from https://doi.org/10.1093/OED/1195323874.

⁷ Under the FLSA, employers take a tip credit of up to $5.12 per hour to bring an employee’s total earnings up to the Federal minimum wage amount. See 29 USC 203(m)(2)(A)(i)-(ii); see also Fair Labor Standards Amendments of 1989, Pub. L. 101–157, § 5, 103 Stat. 938, 941 (1989) (requiring employers to pay directly at least “50 percent of the [$4.25 per hour] minimum wage rate after March 31,1991”).

⁸ The FLSA’s tip credit has several components, including that an employee must be in an occupation in which the employee customarily and regularly receives at least a certain amount per month in tips (more than $30), retains all tips (except for a pool limited to employees who customarily and regularly receive tips), receives other direct wages, and receives advance notice to qualify as a “tipped employee” for whom an employer may take a tip credit against its minimum wage obligations. See 29 U.S.C. 203(m)(2)(A), (t).

⁹ The regulations also provide that “if an employee is in an occupation in which he normally and recurrently receives more than $30 a month in tips, he will be considered a tipped employee even though occasionally because of sickness, vacation, seasonal fluctuations or the like, he fails to receive more than $30 in tips in a particular month.” 29 CFR 531.57.

¹⁰ See DOL Field Operation Handbook, §30d08. Retrieved August 19, 2025, from https://www.dol.gov/agencies/whd/field-operations-handbook; see also WHD Opinion Letter FLSA2009-12 (Jan. 15, 2009); WHD Opinion Letter FLSA2008-18 (Dec. 19, 2008); and WHD Opinion Letter FLSA-858 (June 28, 1985) (concluding that barbacks, itamae-sushi and teppanyaki chefs, and a “wine-server/captain-host,” respectively, could be included in a tip pool with tipped employees for whom the employer took a tip credit)..

¹¹ See, e.g., Wai Man Tom v. Hosp. Ventures LLC, 980 F.3d 1027, 1040 (4th Cir. 2020); Montano v. Montrose Rest. Assocs., Inc., 800 F.3d 186, 191 (5th Cir. 2015) (finding that “[t]he common thread of the cases and the DOL opinion letters is to require a tipped employee to have more than a de minimis interaction with the customers who leave the undesignated tips” for purposes of the FLSA tip credit.); Myers v. Copper Cellar Corp., 192 F.3d 546, 550-51 (6th Cir. 1999); Kilgore v. Outback Steakhouse of Fla., Inc., 160 F.3d 294, 301 (6th Cir. 1998) (noting that restaurant hosts “sufficiently interact with customers in an industry where undesignated tips are common.”).

¹² Section 224(d)(1) specifies that the occupation must have customarily and regularly received tips on or before December 31, 2024. The Treasury Department and the IRS reviewed data for the 2023 tax year because that was the most recent year for which comprehensive income tax return data was available. The Treasury Department and the IRS compared the 2023 tax year data to similar data for 2017-2022. Because 2023 data was similar to prior year data, the Treasury Department and the IRS have reviewed preliminary data for the 2024 tax year and anticipate that final 2024 data will be substantially similar to 2023 data.

¹³ While tip income must be included in the total income that independent contractors report on their income tax returns, independent contractors did not separately report tips on their income tax returns and payors did not separately report tips to payees on Forms 1099.

¹⁴ Taxpayers have a single line to report their occupation on the Form 1040. The 1040 instructions do not address how to report multiple occupations. Some taxpayers reported more than one occupation. Additionally, some taxpayers with multiple jobs only reported one occupation. When analyzing the tax return data, it was sometimes difficult to determine which occupation resulted in the receipt of tips. Therefore, the Treasury Department and the IRS limited the main analysis of the tax return data to taxpayers with only one job by limiting the data to taxpayers who submitted one Form W-2 with their Form 1040, did not file a Schedule C or Schedule F, and reported no active income from a partnership or S corporation on Schedule E.

¹⁵ The GITCA program was established by Rev. Proc. 2003-35, 2003-20 I.R.B. 919, and was updated by Rev. Proc. 2007-32 with a new model GITCA. Revenue Procedure 2020-47, 2020-48 I.R.B. 1121 modified Rev. Proc. 2007-32 to provide that the term of a GITCA is generally five years.

¹⁶ Initial drafts of the OBBBA legislation contemplated a deduction for tips received by individuals in occupations that traditionally and customarily received tips, but this language was later revised to refer to occupations that customarily and regularly received tips.

¹⁷ See Montano v. Montrose Rest. Assocs., Inc., 800 F.3d 186, 189 (5th Cir. 2015) (noting that “[i]t would be circular” to interpret the FLSA to mean that if an employer requires a tipped employee to give another employee tips, that employee customarily and regularly receives tips for purposes of 29 USC 203(m)(2)(A)’s tip pooling limitation).

¹⁸ Office of Management and Budget. (2018). Standard Occupational Classification Manual. U.S. Government Publishing Office. This manual and other related SOC documents can be found at https://www.bls.gov/soc.

¹⁹ Id.

²⁰ Id.

²¹ For instance, the SOC Code for “Animal Caretakers,” is described in the 2018 SOC Code System as an occupation in which individuals “provide care to promote and maintain the well-being of pets and other animals that are not raised for consumption.” More specific occupations that would fall under this description include both pet caretakers and zookeepers. Pet caretakers customarily and regularly receive tips. Zookeepers, on the other hand, do not. Thus, if the “Animal Caretakers” SOC code were included in the list of occupations that customarily and regularly receive tips, then zookeepers would become part of the list via their corresponding SOC code, even though they do not customarily and regularly receive tips.

²² References to a “section” are to a section of the Internal Revenue Code of 1986, as amended (Code), unless otherwise indicated.

²³ See supra, Explanation of Provisions, Sec. 4.A.

²⁴ See Montano v. Montrose Rest. Assocs., Inc., 800 F.3d 186, 189 (5th Cir. 2015) (noting that “[i]t would be circular” to interpret the FLSA to mean that if an employer requires a tipped employee to give a second employee tips, that second employee customarily and regularly receives tips for purposes of 29 USC 203(m)(2)(A)’s tip pooling limitation).

²⁵ The SOC Code system is published by the Executive Office of the President, Office of Management and Budget. The SOC Code system is a Federal statistical standard used by Federal agencies to classify workers into occupational categories for the purposes of collecting, calculating, or disseminating data. See Office of Management and Budget. (2018). Standard Occupational Classification Manual. U.S. Government Publishing Office. This manual and other related SOC documents can be found at https://www.bls.gov/soc.

²⁶ Taxpayers have a single line to report their occupation on the Form 1040. If they have multiple occupations, they may write the occupation for only one of their jobs or they may write multiple occupations. However, when analyzing the tax return data, it would be difficult to determine to which job any reported tips should be assigned when a taxpayer has multiple jobs. Therefore, the Treasury Department and the IRS limited the main analysis of the tax return data to taxpayers with only one job. However, even among this sample, some taxpayers may write both the occupation from their job and a title for a role where they may not receive income, such as “Student/Occupation.”

²⁷ Since tips are reported separately from other compensation for employees but not for self-employed individuals in the current tax return data, these screening criteria that limit the sample to employees with a single job were utilized to better illuminate the link between the self-reported occupations and reported tips.

²⁸ Initial drafts of the OBBBA legislation contemplated a deduction for tips received by individuals in occupations that traditionally and customarily received tips, but this language was later revised to refer to occupations that customarily and regularly received tips.

On January 16, 2025, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-112261-24) in the Federal Register (90 FR 5220) setting forth proposed regulations under sections 355, 357, 361, and 368 of the Code regarding certain matters relating to corporate separations, incorporations, and reorganizations qualifying, in whole or in part, for nonrecognition of gain or loss (proposed technical regulations) and requesting public comment.

On the same date, the Treasury Department and the IRS also published a notice of proposed rulemaking (REG-116085-23) in the Federal Register (90 FR 4687) setting forth proposed regulations that would require multi-year tax reporting for corporate separations and related transactions (proposed reporting regulations). The proposed reporting regulations were consistent with recommendations set forth in a report published by the Treasury Inspector General for Tax Administration titled “A Strategy Is Needed to Assess the Compliance of Corporate Mergers and Acquisitions with Federal Tax Requirements,” Ref. No. 2019-30-050 (Sept. 5, 2019).

The Treasury Department and the IRS received several comments in response to the proposed technical regulations and the proposed reporting regulations, which generally were critical of the proposed guidance. In response to the comments received, the Treasury Department and the IRS are withdrawing the proposed regulations.

The principal author of this notice is Justin R. Du Mouchel of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in its development.

Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Proposed Amendments to the Regulations

Under the authority of 26 U.S.C. 7805, the notices of proposed rulemaking (REG-112261-24 and REG-116085-23) that were published in the Federal Register on January 16, 2025 (90 FR 5220 and 90 FR 4687), are withdrawn.

Edward T. Killen, Acting Chief Tax Compliance Officer.

(Filed by the Office of the Federal Register September 29, 2025, 8:45 a.m., and published in the issue of the Federal Register for September 30, 2025, 90 FR 46776)