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This deduction is a bit misleading. Yes, it does eliminate federal tax on tips, but only for a select or “qualified” group of individuals. Below is the list and link reported by the IRS on www.irs.gov.
https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-billill | Internal Revenue Service
“… Treasury Tipped Occupation Code, provides a three-digit code and descriptions for the occupations listed within the proposed regulations. The proposed regulations group the occupations 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 …”
This applies whether you are self-employed or an employee. Thus, tax accountants, such as myself, are not included.
Tips will still be subject to Social Security, Medicare and your state and local taxes unless you live in a state that has no tax. Example: Florida. There are also stipulations as to what kind of tips are tax free:
“…Qualified tips must be paid voluntarily by the customer and not be subject to negotiation. Qualified tips do not include some service charges. For instance, in the case of a restaurant that imposes an automatic 18% service charge for large parties and distributes that amount to waiters, bussers and kitchen staff; if the charge is added with no option for the customer to disregard or modify it, the amounts distributed to the workers from it are not qualified tips….”
This will force a rethink on tips as a whole, as most incorporated businesses have some type of service charge nowadays. There is also one other repercussion to the tax preparer and taxpayer. Currently the IRS has no immediate guidance on how to report this type of tip on the W-2 /1099-NEC for the upcoming tax season. If you are planning to take the deduction then you, or your employer, will need a way to show the amounts of qualified tips. As always, contact your tax preparer or accountant to discuss tax strategies that will help you benefit from these tax law changes.
Disclaimer: The views expressed in these articles are the opinion of the writer, and is not tax advice. Tax law is always subject to change. This article is for information purposes only. Always consult a qualified tax professional for advice on tax planning and strategies.
