The IRS has released final rules in the federal register for reporting of tips made tax-exempt by 2025’s One Big Beautiful Bill. These rules provide direction on what tip compensation qualifies for the exemption and how to report the compensation to payees.
Briefly, tip compensation is subject to the exemption if it is paid for a qualifying occupation; is reported on forms W-2, 1099-K, 1099-MISC, 1099-NEC, or self-reported on form 4137; and was offered voluntarily and in excess of the minimum fee.
The rules provide an updated list of qualifying occupations and their Treasury Tipped Occupation Codes (TTOC). Tips paid for occupations outside of those listed qualifying occupations are not subject to the exemption. Payers must provide reports of qualifying tips earned by payees, broken down by TTOC, on the appropriate information return.
The tips must have been offered in excess of any mandatory minimum fee, such as automatic service fees, to qualify.
The exemption is requested by the payee on their tax return. No withholding direction is changed by these rules.
The rules are published as 91 FR 19026 and will be codified as 26 CFR § 1.224-1. To review 91 FR 19026, follow this link.
