The Internal Revenue Service has relaxed a rule in the “no tax on tips” legislation so that more workers can potentially take advantage of the perk.
The “no tax on tips” law was a provision included in President Donald Trump’s signature “One Big Beautiful Bill Act,” and a key pledge of his 2024 presidential campaign.
It eliminates federal income taxes on tips for those working in jobs that have traditionally received them.
In a notice published Friday, the IRS said it was providing temporary “transition relief” to workers in certain jobs that otherwise wouldn’t have been eligible for the deduction.
Earlier this year, the IRS issued a list of jobs where tipped income would be eligible for the deduction. However, it also ruled that workers in “specified service trade or business” can’t claim the tax break.
Under the new guidance, workers who receive tips in the course of a specified service trade or business can temporarily benefit.
What is a “specified service trade or business”?
According to the IRS, it is any trade or business providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing in securities, partnership interests, commodities, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
The IRS says the restriction on specified service trade or business now won’t come into force until the first year after the final regulations are released, which means it likely won’t come into effect for the 2026 tax year either.
There is some confusion from employers and workers as to whether they fall into the specified service trade or business category.
“The specified service trade limit depends on the business of the employer,” the Washington Post noted. “So a self-employed piano player might not qualify for the deduction while a piano player employed by a hotel would.”
The Treasury Department acknowledged the confusion in the guidance.
“The Treasury Department and the IRS understand that it may be particularly difficult for employees to determine whether their tips were received in the course of a specified service trade or business,” the Treasury said.
“Accordingly, in the interest of sound tax administration, there will be a transition period for purposes of IRS enforcement and administration with regard to the specified service trade or business requirement,” the department concluded.
Who will benefit from “no tax on tips”?
There are an estimated 6 million workers who report tipped wages, according to the IRS.
The “no tax on tips” provision eliminates federal income taxes on tips for people working in jobs that have traditionally received them and allows certain workers to deduct up to $25,000 in “qualified tips” per year from 2025 through 2028.
The deduction phases out for taxpayers with a modified adjusted gross income over $150,000 and $300,000 for married couples.
Aside from the specified service trade or businesses that will temporarily benefit per the new guidance, to qualify as a tip, the tips must be earned in an occupation on the Treasury’s list of qualified jobs.
They include sommeliers, cocktail waiters, pastry chefs, cake bakers, bingo workers, club dancers, DJs, clowns, podcasters, influencers, online video creators, ushers, maids, gardeners, electricians, house cleaners, tow truck drivers, wedding planners, personal care aides, tutors, au pairs, massage therapists, yoga instructors, skydiving pilots, ski instructors, parking garage attendants, delivery drivers and movers.
What else is in the guidance?
The guidance also clarifies for workers “how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on information returns such as Form W-2 or Form 1099,” the IRS said.
Specific examples were provided by the IRS to illustrate situations tipped employees might come across and how they should fill out the relevant tax forms.
The IRS also advised on how employees can work out the overtime deduction, which is complex.
