Tip tax exemption details released: mandatory bills will not be counted
President Trump promised to make tips tax-free during his campaign. The “Big, Beautiful Act” signed into law in July eliminated federal income tax for workers who traditionally rely on tips. However, the proposed regulations, filed by the Treasury Department in the Federal Register on the 19th, provide more details on the occupations covered, eligible individuals, and what constitutes a “qualified tip.”
The Associated Press reported that this would allow certain categories of workers to deduct up to $25,000 in qualified tips annually from 2025 to 2028. The deduction amount would decrease gradually for taxpayers with adjusted gross incomes exceeding $150,000.
A qualified tip is defined as voluntary, meaning mandatory tips or tips automatically added to bills do not qualify. Tip pools or similar tip-sharing schemes qualify as long as they are reported to the IRS. However, this benefit does not apply to married individuals filing separate tax returns. Tips must be made in cash, check, debit card, gift card, or any other form of payment redeemable for a fixed amount of cash, as opposed to digital assets. Proceeds from illegal activities, prostitution, or pornography do not constitute tips.
Eligible occupations include: Food and Beverage Services, Entertainment and Events, Hotel and Hospitality Services, Home Services, Personal Services, Personal Beauty and Wellness, Leisure and Coaching, and Transportation and Transport. Job titles such as bartenders, restaurant and non-restaurant servers, bartender assistants, chefs and cooks, casino dealers and money changers, dancers, musicians and singers, DJs, clowns, bellhops, attendants, concierges, housekeepers, home maintenance workers, gardeners and landscapers, plumbers, heating and cooling technicians, appliance installers and repairers, personal care workers and waiters, private event planners, private event and portrait photographers, beauticians, masseuses, barbers, hairdressers, pedicurists, tour guides, tour guides, travel guides, valet parking, delivery drivers, movers, and various types of drivers are all included (to name a few), each with a detailed definition.
The tip tax exemption will be retroactive to January 1 of this year. The Yale Budget Lab estimates that approximately 4 million people will work in tipped occupations in 2023, representing approximately 2.5% of all employment opportunities. Congressional budget analysts estimate that the tip tax exemption will increase the deficit by 40 billion yuan by 2028; the nonpartisan Joint Committee on Taxation estimated in June that the tax revenue would be lost by 32 billion yuan over 10 years.
