IRS Issues Guidance on “No Tax on Tips” Rule: What Workers and Businesses Need to Know
The recently passed One, Big, Beautiful Bill brought sweeping changes to the tax code, and one of the most talked-about provisions is the “no tax on tips” rule. On September 19, 2025, the Treasury Department and IRS issued proposed regulations clarifying exactly which occupations qualify and what counts as a “qualified tip.”
This new guidance is especially important for businesses in hospitality, personal services, and entertainment, as well as for individuals who rely heavily on tips as part of their income. If you or your employees work in industries where tipping is common, this change could have a big impact on your tax planning.
At Velin & Associates, Inc., we help professionals and business owners — from YouTubers and creators to doctors, dentists, and online sellers — navigate these kinds of IRS changes and maximize their tax benefits. Here’s what you need to know.
Occupations That Qualify for the “No Tax on Tips” Rule
The IRS has listed nearly 70 occupations that customarily and regularly receive tips. These are grouped into eight categories:
- Beverage and Food Service – Bartenders, servers, bussers.
- Entertainment and Events – Casino workers, performers, ushers.
- Hospitality and Guest Services – Hotel staff, bellhops, concierge.
- Home Services – Housecleaners, movers, landscapers.
- Personal Services – Valets, pet sitters, delivery helpers.
- Personal Appearance and Wellness – Hairdressers, barbers, spa workers.
- Recreation and Instruction – Golf instructors, tour guides, coaches.
- Transportation and Delivery – Taxi drivers, rideshare drivers, water taxi operators.
👉 Example: A hair stylist receiving tips from clients can deduct those qualified tips under the new rule. A golf instructor receiving tips from students qualifies as well.
What Counts as a Qualified Tip?
The IRS has drawn a clear line between qualified and non-qualified tips:
✅ Qualified Tips
- Paid in cash or cash equivalents (check, credit card, debit card, gift card, Venmo, etc.).
- Received directly from the customer or through a tip pool.
- Paid voluntarily by the customer, not mandatory.
❌ Not Qualified Tips
- Automatic service charges (e.g., 18% fee for large parties at a restaurant).
- Amounts received through illegal activity (prostitution, pornography, etc.).
👉 Example: A restaurant server who receives a $20 tip from a customer on a credit card — qualified. But if the same server gets part of an 18% mandatory service fee automatically added to the bill, that amount is not qualified.
Why This Matters for Businesses and Workers
The “no tax on tips” rule could reduce taxable income for millions of workers in service industries. However, it also means businesses must carefully track and distinguish between qualified and non-qualified tips.
- For employers: Payroll systems may need to be updated to separate taxable wages from non-taxable tips.
- For employees: Recordkeeping will be critical to ensure accurate reporting and avoid IRS challenges.
👉 Example: A rideshare driver who receives both app-based tips and cash tips must track both to properly claim the deduction.
Who Benefits the Most?
While the rule primarily impacts traditional tipped workers, it also affects adjacent industries and business owners:
- Restaurant owners and hospitality businesses must implement new compliance systems.
- Freelancers and creators (such as YouTubers, TikTokers, and filmmakers) who occasionally receive gratuities or “tips” through platforms (like Super Chats, Venmo, or PayPal) may fall under these rules if classified properly.
- Doctors, dentists, and medical practices generally don’t receive tips, but may need guidance if non-traditional gratuities are offered to staff.
- High net worth individuals who invest in or operate businesses in the hospitality or service sector should review entity structures to maximize tax benefits under the new rules.
What’s Next?
The Treasury and IRS are currently accepting public comments on these proposed regulations through October 23, 2025. Final rules are expected in 2026. Until then, businesses and workers should begin preparing systems to track tips more accurately.
How Velin & Associates Can Help
At Velin & Associates, Inc., we work with clients across industries — from Amazon sellers and Shopify store owners to dentists, doctors, and online creators — to make sure they stay compliant while taking advantage of every available tax break.
We can help you:
- Understand how the “no tax on tips” rule applies to your business or industry.
- Separate qualified from non-qualified tips in payroll and accounting.
- Plan ahead for IRS changes that may affect your bottom line.
- Avoid penalties while maximizing deductions.
Final Thoughts
The “no tax on tips” rule is a major shift in how tipped income is treated. For workers, it means potential savings. For business owners, it means new compliance responsibilities. Either way, the sooner you prepare, the smoother the transition will be.
If you’re unsure how these new rules impact you or your business, now is the time to consult with an experienced CPA.
For more information about our tax planning services, contact us today: visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.