IRS Finalizes 'No Tax on Tips' Rules — 71 Occupations Listed, What Payroll Teams Must Do Now
Final regulations under OBBBA's Section 224 define 'qualified tips,' publish a closed list of 71 tipped occupations with Treasury Occupation Codes, and establish employer reporting obligations starting in 2026. Here is what payroll professionals need to know.
⚡Key Takeaways for Payroll Professionals
- 71 occupations are now listed as eligible for the OBBBA 'No Tax on Tips' deduction, assigned Treasury Tipped Occupation Codes (TTOCs).
- Deduction is up to $25,000 per year for eligible workers in tax years 2025–2028, available to both itemizers and non-itemizers.
- Qualified tips must be cash, voluntary, and customer-paid — automatic gratuities and service charges do not qualify.
- 2026 W-2 reporting is mandatory: Box 12 code TP for qualified tips and Box 14b for the Treasury Tipped Occupation Code.
- Employers must classify each tipped employee's occupation under the TTOC system and segregate qualified tip amounts throughout 2026.
- Managers and supervisors cannot claim tips received through tip pools as qualified tips.
The Final Tip Regulations — What They Establish
On April 10, 2026, the IRS and U.S. Treasury issued final regulations (T.D. 10044) implementing the "No Tax on Tips" provision of the One Big Beautiful Bill Act (OBBBA), published in the Federal Register on April 13, 2026. These regulations finalize the list of occupations whose workers may claim a deduction of up to $25,000 per year in qualified tips on their federal income tax return, effective for tax years 2025 through 2028. The regulations are effective June 12, 2026, but apply retroactively to tax years beginning after December 31, 2024.
Deduction is Available Regardless of Whether the Worker Itemizes
The OBBBA tip deduction is an above-the-line adjustment available to all eligible workers — those who take the standard deduction and those who itemize. The deduction begins to phase out at $150,000 of adjusted gross income ($300,000 for joint filers), reducing by $100 for every $1,000 of income above the threshold.
71 Eligible Occupations and the TTOC System
The final regulations establish an exhaustive, closed list of 71 occupations eligible for the deduction, organized into eight broad categories and assigned three-digit Treasury Tipped Occupation Codes (TTOCs). The list is not expandable by employers — a worker must fall into one of the listed occupations to qualify.
📋 TTOC Occupation Categories (8 Groups)
IRS T.D. 10044 · April 2026
| Category | Examples of Included Occupations |
|---|---|
| Food & Beverage | Servers, bartenders, bussers, baristas, food delivery drivers |
| Personal Services | Hairdressers, barbers, nail technicians, estheticians, tattoo artists, visual artists, floral designers |
| Transportation & Delivery | Taxi drivers, rideshare drivers, water taxi operators, gas pump attendants, baggage handlers |
| Hospitality & Lodging | Hotel valets, bellhops, doormen, concierge staff, housekeeping |
| Gaming & Entertainment | Casino dealers, gaming industry workers (per GITCA program) |
| Automotive Services | Car wash attendants, parking attendants |
| Digital Content Creators | TTOC 209 — voluntary payments received after accessing content qualify; payments for access to content do not |
| Golf & Recreational | Golf caddies, ski instructors, marina attendants |
Specified Service Trades or Businesses (SSTBs) Are Excluded
Workers employed by SSTBs — including health care providers, law firms, performing arts businesses, and athletic organizations — are generally not eligible for the tip deduction, even if their occupation would otherwise qualify. IRS transition relief under Notice 2025-69 suspends enforcement of this exclusion until SSTB-specific final regulations are issued. Employers in potentially affected industries should monitor IRS guidance closely.
What Counts as a Qualified Tip
A qualified tip under the final regulations must satisfy all of the following criteria simultaneously:
- Cash or cash-equivalent form — includes checks, credit cards, debit cards, gift cards, mobile payment apps denominated in cash, and casino chips. In-kind tips (event tickets, meals, goods) do not qualify.
- Voluntarily paid by the customer — the customer must have the option to pay zero. A POS device must include a "no tip" or zero-slider option. If the customer cannot opt out, the amount is not a qualified tip.
- Not subject to negotiation — a tip pre-agreed between customer and service provider in exchange for a specific level of service does not qualify.
- Received in an eligible occupation — the worker must be employed in one of the 71 TTOC-listed occupations.
- Reported on Forms W-2, 1099-NEC, 1099-K, or Form 4137 — the deduction requires documented reporting. Unreported cash tips do not qualify.
What Is Excluded
Several categories of payments are explicitly excluded from qualified tip status:
🚫 Payments That Do Not Qualify as Tips
IRS T.D. 10044 · April 2026
| Payment Type | Reason for Exclusion |
|---|---|
| Automatic gratuities / mandatory service charges | Not voluntarily paid; customer has no option to reduce to zero |
| Tips received by managers or supervisors through tip pools | Tip pool amounts distributed to managers are not qualified tips; however, tips earned directly by a manager in a tipped-occupation role may qualify |
| Employer-paid tips | Irrebuttable presumption of wage recharacterization — employer cannot be the payor of the tip |
| Tips to workers with ≥5% ownership in the payor entity | Irrebuttable presumption of recharacterization |
| In-kind tips (meals, event tickets, property) | Not denominated in cash |
| Compensation restructured as tips | Facts-and-circumstances recharacterization test applies |
Employer Reporting Obligations in 2026
The 2026 Form W-2 includes two new fields specifically for qualified tip reporting. These fields were not required for 2025 (transition relief applied), but are mandatory beginning with wages paid in 2026:
📋 New 2026 Form W-2 Fields for Tips
IRS Form W-2 (January 2026)
| Field | What to Report | Status |
|---|---|---|
| Box 12, Code TP | Total amount of qualified tips reported to the employer during the calendar year | New 2026 |
| Box 14b | Treasury Tipped Occupation Code (three-digit TTOC) for the employee's qualifying occupation | New 2026 |
Gig Workers and Self-Employed Individuals Can Also Qualify
The tip deduction is not limited to W-2 employees. Independent contractors and gig workers in qualifying occupations who receive tips reported on Form 1099-NEC, 1099-K, or reported by the worker on Form 4137 may also claim the deduction. Self-employed workers are limited to net income from the relevant occupation.
Action Checklist for Payroll Teams
1
Required · Now
Identify and classify all employees in tipped occupations by TTOC
Work with HR to review every employee role against the 71-occupation TTOC list. Assign the appropriate three-digit code to each qualifying employee. Document the determination — employers will be responsible for these classifications on 2026 W-2 forms.
2
Required · Now
Configure payroll systems to segregate and accumulate qualified tip amounts
Payroll software must track qualified tip amounts separately from wages throughout 2026 for year-end Box 12 code TP reporting. Confirm your payroll vendor has implemented this capability — do not wait until Q4.
3
Required
Audit service charges and gratuity structures
Review all mandatory gratuity, service charge, and auto-gratuity policies. Amounts that are mandatory or pre-determined do not qualify as tips. Ensure POS systems allow customers to reduce tips to zero. Restructured compensation arrangements that recharacterize wages as tips are subject to IRS scrutiny.
4
Best Practice
Communicate the deduction benefit to eligible employees
Employees in qualifying occupations who submit a revised 2026 W-4 can claim the tip deduction through reduced withholding throughout the year, rather than waiting for a year-end refund on their Form 1040. A proactive communication campaign builds employee trust and reduces year-end payroll inquiries.
5
Monitor
Watch for final SSTB regulations and outstanding IRS guidance
The SSTB exclusion (affecting health care, performing arts, athletics, and similar businesses) remains under IRS transition relief. Final regulations on this issue have not yet been issued. Employers in potentially affected industries should track IRS releases and consult their tax counsel.
📎 Source & Attribution
“Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips”
This article represents independent analysis and editorial commentary by the einTime team, prepared for the benefit of payroll professionals. Content draws on publicly available regulatory documents and government publications. All compliance decisions should be verified against applicable regulatory guidance and reviewed with a qualified tax advisor or employment counsel.
ET
einTime Editorial Team
Payroll Compliance Analysts · einTime Resource Center
The einTime editorial team tracks federal, state, and local regulatory developments affecting payroll operations and translates regulatory complexity into practical guidance for payroll professionals.
📅 Key Deadlines
Apr13
Final regulations published — effective June 12, 2026
Jun12
Regulations become effective
Jan31
2026 W-2s with Box 12 TP and Box 14b due to employees
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🔗 Source Reference
Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips
Federal · April 13, 2026
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