Tipping has long been a key part of income for many workers, but until now, it hasn’t come with much in the way of tax relief. However, the IRS’s newly finalized rules on qualified tip income offer the possibility of change. Under the 2025 tax law, this new provision allows eligible taxpayers to deduct a portion of their tip income.

This regulation will be effective on June 12, 2026, and provides important clarity around what constitutes as a cash tip, as well as additional eligible occupations and anti-fraud frameworks. Like many new tax rules, the benefit is accompanied by specific requirements and a fair amount of nuance. Here’s what you need to know to understand—and potentially take advantage of—the qualified tip income deduction.

The new tax break for tip income

As part of the 2025 tax law, section 224 allows for a temporary deduction of up to $25,000 of cash tips per return for tax years 2025-2029. Section 224 also phases out $100 for each $1,000 of modified adjusted gross income (MAGI) in excess of $150,000—or $300,000 for a joint return.

To claim this deduction, the social security number of each individual filing must be included on the return. This means that if a married couple are both claiming this deduction, both social security numbers must be included on the return. However, it’s important to note that married individuals are required to file jointly to claim this deduction.

What does and doesn’t count as a tip

The IRS also provided additional clarity on what counts as a tip. “Cash tips” now broadly covers the following in addition to physical cash:

• Checks
• Credit and debit cards
• Gift cards
• Mobile payments
• Casino chips and similar items that can be exchanged for cash
• Foreign currency

However, not everything qualifies as a cash tip. In this update, the IRS made it clear that digital assets (e.g., cryptocurrency and stablecoins) do not count. Additionally, noncash items, including event tickets, meals, or services, are also excluded.

The importance of voluntary tipping

The IRS has maintained that a tip must be voluntary, and there must be an option to leave no tip in order for the tip to be eligible for the deduction. For example, tip money would be eligible for the deduction if a customer has the option to select “no tip” when buying a meal, even if the check out screen shows suggested tipping amounts. However, if a minimum tipping amount is required, only money given in excess of the minimum would qualify.

Importantly, this rule states that mandatory service charges or automatic gratuities still don’t qualify—even if the money is ultimately distributed to employees.

Occupations eligible for the deduction

While you may associate tipping with restaurants, the IRS expanded and clarified the list of eligible occupations. The newly added roles are:

• Visual artists
• Floral designers
• Gas pump attendants

There are also several notable updates to the existing eligible categories and examples, including:

• Eyebrow and eyelash technicians
• Pet and show animal caretakers, which includes horse groomers
• Waitstaff, including banquet staff
• Event officiants, including clergy
• App-based delivery drivers and rideshare drivers
• Even digital content creators may qualify if payments are voluntary

You can review the full list of eligible occupations here. However, if your occupation is not on the IRS list, your tips will not qualify, regardless of how common tipping is in your field.

Special rules for managers and business owners

The regulations also address situations where roles overlap. Managers generally cannot claim tips from tip pools; however, if a manager directly receives a tip while performing the same duties as tipped staff, such as filling in as a server, it may qualify.

Important reporting requirements and anti-abuse provisions

Even if your tips qualify, you won’t get the deduction unless they’re properly reported. The IRS requires that tips be reported on the appropriate information returns or included on Form 4137. There are also limits for self-employed individuals established to ensure that the deduction doesn’t create or increase a loss.

There are also strict rules to prevent abuse. The following are examples of what would be considered abuse:

• Tips paid by an employer to an employee
• Tips paid to someone who owns 5% or more of the business
• Significant changes to payment practices (e.g., invoicing at a lower amount with the intention of the tip making up the difference)

Final thoughts

The new qualified tip income deduction could offer meaningful tax savings, but only if you meet all the requirements. Whether you’re an employee who earns tips or a business navigating how these rules apply to your workforce, you don’t have to figure it out alone.

SEK’s tax team is ready to help you understand these regulations, stay compliant, and make the most of available tax opportunities. Contact us today to get started.