Deduction Eligible Tipped Occupations

At A Glance

• The One Big Beautiful Bill Act (OB3) signed into law on July 4, 2025, created a tax deduction for employees in tipped occupations.
• The IRS and Treasury Department released a preliminary list of tipped occupations eligible to claim this deduction. 
• Employers have until tax year 2026 to update W-2 forms and may use reasonable accounting methods to furnish eligible employees with a statement of 2025 tips. 
• State and federal wage and hour laws still apply to occupations on the preliminary list. 

OB3 Qualified Tips Tax Deduction 

Under the OB3’s new Qualified Tip Deduction individuals may deduct the qualified tips they receive during the tax year, specifically "…cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024.” 

Eligible employees will be able to deduct qualified tips on their individual federal tax returns, up to certain amounts. 

To support compliance, OB3 required the IRS to publish a list of qualifying occupations. On September 2, 2025, the IRS and Treasury Department released a preliminary list of such tipped occupations, clarifying which employees will be entitled to claim the deduction.

Eligible Positions

Per the Treasury Department, the official list of qualifying occupations will be published in the Federal Register as part of the upcoming proposed regulations from Treasury and the IRS. While there will be a public comment period, the final list is expected to closely mirror the preliminary version.

The preliminary list includes, but isn’t limited to, occupations in the industries below. As such, please review the list in its entirety for the exact positions considered to be tipped occupations.

• Beverage and Food Service
• Entertainment and Events
• Hospitality and Guest Services
• Home Services
• Personal Services
• Personal Appearance and Wellness
• Recreation and Instruction
• Transportation and Delivery

Each occupation on the list includes a Treasury Tipped Occupation Code (TTOC). Employers must report this code in Box 14b of the 2026 Form W-2, along with qualified tips in Box 12 (code TP). 

For tax year 2025, employers may use any reasonable accounting method to furnish employees with a statement of qualified tips. 

Minimum Wage Requirements

The preliminary list includes positions typically paid the minimum wage. However, these positions may participate in tip-pooling agreements or otherwise receive tips on a less frequent basis, not meeting the Fair Labor Standards Act’s (FLSA) $30 monthly tip threshold, which is required to pay the lower tipped employee cash wage.

As OB3 did not modify the FLSA, employers are not permitted to take a tip credit for employees who do not regularly receive at least $30 per month in tips.  

Next Steps

After the IRS publishes the official list in the Federal Register, employers may submit comments on the preliminary list of tipped occupations.

In the meantime, employers should monitor the Federal Register for the final list, follow state and local minimum wage regulations, and continue complying with FLSA regulations for all tipped occupations.

To learn more about OB3’s tax deductions for tips and overtime, please see our previous alert.  

Thank you for choosing Paylocity as your Payroll Tax and HCM partner. This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.