In brief
The U.S. Treasury Department is nearing the implementation of President Donald Trump’s 'No Tax on Tips' initiative, designed to eliminate federal income taxes on tips for workers in designated occupations. The proposed regulations clarify who qualifies and the nature of 'qualified tips', potentially affecting the benefits for millions of tipped workers.
WASHINGTON (AP) — The Treasury Department is moving forward with President Donald Trump’s promise of 'no tax on tips', but new guidance released on Friday appears to narrow the number of eligible tipped workers.
The agency submitted proposed regulations to the Federal Register, detailing the occupations that qualify and the criteria for tipping under this rule.
The 'no tax on tips' measure, part of Republicans' extensive tax reform legislation signed by Trump in July, allows certain workers to deduct up to $25,000 in 'qualified tips' per year from their taxable income from 2025 through 2028, with benefits phasing out for those earning over $150,000.
To qualify as a tip, it must be given in an occupation listed in the Treasury’s guidelines. This includes a range of positions, but excludes several roles like sommeliers, cocktail waiters, and others from receiving the tax benefit.
According to the rules, tips must be voluntarily given and cannot include mandatory gratuities or auto-gratuities. However, pooled tips reported to the IRS can qualify. Married individuals filing separately will not be eligible for this benefit.
The proposed regulations specify that only cash, checks, or similar items convertible to cash qualify as tips, excluding proceeds from illegal activities.
Furthermore, the provision will be applied retroactively to January 1, 2025. The Yale Budget Lab has estimated that about 4 million workers are in tipped occupations, representing approximately 2.5% of the workforce.
While the 'No Tax on Tips' provision aims to assist workers, analysts predict it could increase the federal deficit by $40 billion through 2028.
Only tips reported on employees’ W-2 forms will qualify, while payroll and local taxes will continue to apply.
