Treasury proposes tighter rules for 'no tax on tips' program, narrowing eligibility

WASHINGTON — The Treasury Department on Friday released proposed regulations implementing the no tax on tips provision, moving President Donald Trump's pledge closer to reality while narrowing the number of workers who will benefit.

Under the guidance, the government specifies which occupations qualify and what counts as a qualified tip. The measure allows certain workers to deduct up to $25,000 in qualified tips per year from 2025 through 2028, with the deduction phasing out for taxpayers with a modified adjusted gross income above $150,000.

Per the proposal, a tip must be voluntary and earned in an occupation on Treasury's list of qualified occupations. The list includes roles such as 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 attendants, delivery drivers and movers.

Tips must be paid in cash, check, debit card, gift card or any item exchangeable for cash; mandatory tips or auto-gratuities do not qualify. Tip pools and similar arrangements are eligible if the tips are reported to the Internal Revenue Service and are genuinely voluntary. The rule is not available to married individuals who file separately. Tips must be reported to the employer and noted on the worker's W-2 in order to qualify.

Tips earned for illegal activity, prostitution services or pornographic activity do not qualify as tips under the Treasury guidelines. The guidance also clarifies that the no tax on tips provision applies only to federal income tax, while payroll taxes for Social Security and Medicare would still be collected, along with state and local taxes.

Officials say the change will be implemented retroactively to Jan. 1, 2025. The Yale Budget Lab estimates about 4 million workers were in tipped occupations in 2023, roughly 2.5% of all jobs.

CBO and budget analysts project tax effects that will affect the deficit. The nonpartisan Joint Committee on Taxation estimated the tips deduction will cost about $32 billion over 10 years, while congressional budget analysts project the provision will increase the deficit by about $40 billion through 2028.

Only tips reported to employers and noted on a worker's W-2 qualify; payroll taxes would continue to be collected. The proposed regulations are to be published in the Federal Register for public comment, and Treasury officials emphasized that employers should maintain careful records of tip reporting to support the deduction's eligibility.