Internal Revenue Service Publishes Final Rule for “No Tax on Tips” Deduction

As previously reported, the so-called “One Big Beautiful Bill Act” (OBBBA) provides an income tax deduction for “qualified tips” received by individuals in occupations that customarily and regularly received tips on or before December 31, 2024. The Internal Revenue Service (IRS) published a preliminary list of such occupations in early September 2025 and repeated that list verbatim in a notice of proposed rulemaking published later that month. In April 2026, the IRS published its Final Rule to identify occupations that customarily and regularly received tips on or before December 31, 2024.

Responding to more than 300 comments, the IRS made only minor modifications to the list of qualifying occupations:

• The IRS did not remove any occupations from the list contained in the preliminary list or proposed rule.
• The IRS added just three new occupations to the list: “Visual Artists” (TTOC 509), “Floral Designers” (TTOC 510), and “Gas Pump Attendants” (TTOC 810).
• The IRS slightly broadened three other occupation categories:
  • “Food Servers, Non-restaurant” (TTOC 103) became “Food and Beverage Servers, Non-restaurant.”
  • “Pet Caretakers” (TTOC 506) became “Pet and Show Animal Caretakers.”
  • “Eyebrow Threading and Waxing Technicians” (TTOC 606) became “Eyebrow and Eyelash Technicians.”
• The IRS rejected requests to add chiropractors, accountants, tax preparers, concert merchandise sellers, and “low bono” legal service providers (legal professionals who provide legal services to clients on a sliding scale based on income) to the list of qualifying occupations.

The proposed rule included “illustrative examples” of each occupation, and the IRS added a few more examples to the Final Rule, including adding banquet staff as an example of “Wait Staff” (TTOC 102), clergy as an example of “Event Officiants” (TTOC 505), and app/platform based delivery person as an example of “Goods Delivery People” (TTOC 804). The IRS emphasized that while the list of qualifying occupations is exhaustive, the illustrative examples are not exhaustive, and other jobs may fit within the list of qualifying occupations. 

The Final Rule explained that when an employee works in two different occupations for the same employer, but only one of those occupations qualifies for the deduction, only tips received in that occupation may be claimed as qualified tips. For example, the role of manager is not a qualifying occupation. If a restaurant manager occasionally performs duties as wait staff, however, they may claim the deduction for any tips they receive directly from customers based on the service that they directly and solely provide, using the Wait Staff (TTOC 102) occupation code. If that same manager receives a separate tip for services provided in their capacity as a manager (e.g., for adeptly handling a situation involving a dissatisfied patron), that tip would not qualify for the deduction. Finally, because managers and supervisors may not participate in a tip pool under the FLSA, any tips received by a manager or supervisor from a tip pool would not qualify for the deduction.

Echoing its earlier position that whether an employee “customarily and regularly received tips” for purposes of the OBBBA’s tax deduction does not depend on whether the employee “customarily and regularly received tips” for purposes of the tip credit eligibility under the FLSA, the IRS emphasized that “the inclusion of occupations as tipped occupations under [the OBBBA] has no bearing or effect on what occupations are considered tipped for purposes of the FLSA.” Thus, dishwashers, cooks, and other “back of house” employees remain on the IRS’s final list of qualifying occupations even though they do not qualify for the tip credit.

The proposed regulation would have defined cash tips as tips 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. The Final Rule made a few changes to this definition, clarifying that cash tips: (a) include amounts paid in foreign currency; but (b) exclude digital assets (i.e., any digital representation of value which is recorded on a cryptographically secured distributed ledger or similar technology).

Finally, the Final Rule emphasized that an amount is not a qualified tip if, based on all relevant facts and circumstances, the amount represents a recharacterization of wages or payments for goods or services. Such indicia of an improper recharacterization may include: (a) a reduction in the charge for services coinciding with a corresponding increase in the cash tip reported; (b) a significant shift in historical tipping or payment practices between the payor and the tip recipient; (c) the payor of the cash tip is the tip recipient’s employer; and/or (d) the tip recipient has a direct ownership interest in the payor. 

The OBBBA requires employers to include on the Form W-2: (a) the total amount of cash tips reported to the employer, including tips received in cash, charged, or under a tip-sharing arrangement (in Box 12 using code “TP”); and (b) the employee’s occupation code(s) (in new Box 14b). The early release draft of the IRS instructions for the 2026 Form W-2 indicates that: (a) employers will be able to enter up to two codes for each employee; (b) if tips were received in more than two occupations, the employer will be required to enter just two of them; and (c) if any tips were received in a nonqualifying occupation, then “000” must be input as one of the codes. 

Employers should prepare now to ensure that they are ready to comply with their tax reporting obligation.