Section 224 was added by section 70201 of Public Law 119-21 and applies to taxable years beginning after December 31, 2024. It ends for taxable years beginning after December 31, 2028. The first filing season under it is over, the final occupation regulations are out, and 2026 Forms W-2 now carry separate tip boxes. This article covers what a preparer has to explain to an individual client who works for tips, and what to collect before the 2026 return.
What does the deduction actually do?
The deduction reduces taxable income. It does not exclude tips from gross income, and it does not touch payroll taxes. The 2026 Form W-2 instructions say tips remain generally subject to federal income tax withholding and to both the employer and employee shares of social security and Medicare tax. Clients who expect "no tax" to mean a larger paycheck need to hear this early.
Section 63(b) was amended so the deduction is allowed to non-itemizers. It is claimed on Part II of Schedule 1-A, and the Schedule 1-A total flows to Form 1040, line 13b, according to the IRS fact sheet on the new schedule.
How much can a client deduct?
The statute sets three limits.
- Dollar cap. The deduction cannot exceed $25,000 for the taxable year. The statute states one $25,000 cap with no separate joint return figure, and the IRS describes it as up to $25,000 per return.
- Income phase-out. The allowable amount, after the cap, is reduced by $100 for each $1,000 by which modified adjusted gross income exceeds $150,000 ($300,000 on a joint return). MAGI is AGI increased by amounts excluded under sections 911, 931 or 933. A client with the full $25,000 loses the deduction entirely once MAGI is $250,000 over the threshold.
- Self-employed limit. For tips received in a trade or business other than as an employee, tips count only to the extent gross income from that business (including the tips) exceeds the deductions allocable to it. The IRS release on the final regulations describes this as limiting the deduction to net income.
Who qualifies for the deduction?
The occupation test
Qualified tips must be received in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. Treasury and the IRS issued final regulations (TD 10044, published in the Federal Register on April 13, 2026) listing these occupations under Regulations section 1.224-1. The IRS release says the list covers more than 70 occupations, each with a three-digit Treasury Tipped Occupation Code (TTOC), grouped into eight categories:
- 100s Beverage and Food Service
- 200s Entertainment and Events
- 300s Hospitality and Guest Services
- 400s Home Services
- 500s Personal Services
- 600s Personal Appearance and Wellness
- 700s Recreation and Instruction
- 800s Transportation and Delivery
The final rules added visual artists and floral designers to Personal Services and gas pump attendants to Transportation and Delivery. Use the list in the regulation or IRS.gov/tippedoccupations to match the client's actual job, not the employer's job title.
The tip itself
The statute requires that the amount be paid voluntarily without any consequence for nonpayment, not be the subject of negotiation, and be determined by the payor. "Cash tips" include tips paid in cash or charged and, for employees, amounts received through a tip-sharing arrangement.
The final regulations and the IRS release add detail that matters in client interviews:
- Service charges. An automatic charge is not a qualified tip unless the customer can disregard or modify it. The IRS example is an automatic 18% large-party charge that the customer cannot opt out of: it is not a qualified tip even if it is distributed to staff.
- Form of payment. Cash or an equivalent counts, such as check, credit or debit card, gift card or a cash-denominated electronic payment. The final regulations exclude all digital assets from cash tips.
- Recharacterization. The final regulations create an irrebuttable presumption that an amount is not a qualified tip when the payor is the recipient's employer, or when the recipient holds a direct ownership interest in the payor. For a corporation, ownership means 5 percent or more of the stock by vote or value, and the regulations set similar 5 percent tests for partnerships and other entities. Owner-operators of salons, bars and tour businesses need this point raised before they assume a deduction.
The specified service trade or business rule
The statute also excludes tips received in a specified service trade or business under section 199A(d)(2), and an employee is tested by the employer's business. Notice 2025-69 gives transition relief: until January 1 of the first calendar year after final regulations on this point are issued, the IRS will treat an employee (and a non-employee) in a listed occupation as not receiving tips in such a business. TD 10044 does not address this exclusion and reserves Regulations section 1.224-1(g) for it, so the relief runs until January 1 of the calendar year after separate final regulations on this point are issued. Recheck the status for each later tax year.
SSN and filing status
The return must include the individual's social security number, defined by reference to section 24(h)(7). The IRS fact sheet describes it as a number valid for employment. Omitting a correct SSN is treated as a mathematical or clerical error under section 6213(g)(2). A married client must file jointly; married filing separately gets no deduction.
Which statements support the deduction?
Section 224(a) allows the deduction only for qualified tips included on an information statement (Form W-2 or the applicable Form 1099) or reported by the taxpayer on Form 4137. That is the reason documentation drives this deduction.
2025 returns. Forms for 2025 were not changed, so Notice 2025-69 let employees measure qualified tips using any of: box 7 social security tips on Form W-2, the total of tips reported to the employer on Forms 4070 (or a similar monthly report), or an amount the employer voluntarily reported in box 14 or on a separate statement. Tips on line 4 of Form 4137 can be added. Non-employees could use earnings statements, point-of-sale reports, daily tip logs or platform records when the Form 1099 did not break out tips. The notice's example of a tour guide with a $55,000 Form 1099-K who kept a log showing $7,000 of tips allows the $7,000.
2026 returns. The 2026 Form W-2 reports cash tips reported to the employer in box 12 with code TP, and the occupation in new box 14b using up to two TTOC codes. If any tips were received in a nonqualifying occupation, the employer must enter code "000" as one of the codes. A "000" on a client's W-2 is a prompt to ask which share of the tips came from a listed occupation. For workers paid on Forms 1099, read the 2026 form for the tip breakout and keep the client's own logs as backup.
For more on the 2026 information return changes that affect gig and platform workers, see Form 1099 thresholds in 2026.
Does a 2025 return need to be amended?
Possibly. The IRS page on amended returns says the final regulations clarified some categories and added occupations, and that a taxpayer who already filed a 2025 Form 1040, 1040-SR or 1040-NR may amend to claim or change the deduction. Pull the list of tipped clients whose 2025 returns omitted the deduction because the occupation looked borderline, and rerun them against the final list.
Interaction with other provisions
- QBI. Section 199A(c)(4) now excludes from qualified business income any amount deductible under section 224(a). A sole proprietor with tips cannot count the same dollars twice. See the QBI deduction after the 2025 legislation.
- Withholding and estimates. The statute directs Treasury to modify withholding procedures for years after 2025 to account for the deduction. Self-employed tip earners should rerun projections; see estimated tax payments and safe harbors.
- Overtime. Qualified tips are excluded from qualified overtime compensation, so the same dollars cannot be used for both deductions. The overtime side is covered in the qualified overtime deduction.
Client file checklist
- Occupation and TTOC, matched to the final list, with a note on any "000" code.
- Form W-2 box 12 code TP and box 14b, or for 2025 the method chosen under Notice 2025-69.
- Forms 4070 or the employer's monthly tip reports, plus Form 4137 if unreported tips were added to income.
- For self-employed clients: tip logs, platform statements and a net income computation for the business.
- Ownership in the payor, and whether any amount was a mandatory service charge.
- SSN validity and filing status for the year.
The client bears the burden of proving eligibility and amount, and Notice 2025-69 reminds taxpayers to keep adequate books and records. Put the support in the file now, while the employer's records are easy to get.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- U.S. Government Publishing Office, Public Law 119-21 (sections 70103, 70201 and 70202): https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm
- IRS, Notice 2025-69, Guidance for Individual Taxpayers who received Qualified Tips or Qualified Overtime Compensation in 2025: https://www.irs.gov/pub/irs-drop/n-25-69.pdf
- IRS, Treasury, IRS issue final regulations listing occupations where workers customarily and regularly receive tips (IR-2026-49): https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill
- Federal Register, TD 10044, Occupations that Customarily and Regularly Received Tips; Definition of Qualified Tips: https://public-inspection.federalregister.gov/2026-07104.pdf
- IRS, Claiming no tax on tips deduction may require an amended return: https://www.irs.gov/forms-pubs/claiming-no-tax-on-tips-deduction-for-occupations-that-customarily-and-regularly-receive-tips-may-require-an-amended-return
- IRS, Schedule 1-A, Additional Deductions: What to know about the new form (FS-2026-04): https://www.irs.gov/newsroom/schedule-1-a-additional-deductions-what-to-know-about-the-new-form
- IRS, 2026 General Instructions for Forms W-2 and W-3: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf
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