The Service released further guidance for taxpayers who may benefit from the “No Tax On Tips” provision in the One Big Beautiful Bill Act on the Friday before tax season ended. These changes may require amending millions of W-2’s and Income Tax Returns that have already been filed.
Despite the name of the provision, tipped earnings may still be taxed in some capacity. The deduction only applies to federal income tax, so workers’ tips may still be subject to Social Security, Medicare, and State Income Taxes.
The law, which only applies to tax years 2025 through 2028, allows workers to deduct up to $25,000 in “qualified tips.” This deduction phases out for individual filers earning more than $150,000 a year and married couples making above $300,000.
According to the Service, an estimated 6 million taxpayers report tipped wages.
The final regulation released on April 10th, names over 70 occupations that may receive tips qualifying for the deduction, and it clarifies the definition of qualifying tips. Qualifying occupations fall into one of the following eight categories…
1 – Beverage and food service which includes bartenders, wait staff, and dishwashers
2 – Entertainment and events which includes musicians, DJs, and other performers
3 – Hospitality and guest services which includes concierges and housekeeping staff
4 – Home services which includes repair workers and groundskeepers
5 – Personal services which includes event planners, photographers, and personal care aides
6 – Personal appearance and wellness which includes hair stylists, makeup artists, and personal trainers
7 – Recreation and instruction which includes tour guides, activity instructors, and golf caddies
8 – Transportation and delivery which includes taxi and rideshare drivers, movers, and delivery workers
Qualified workers who receive qualifying tips must meet several criteria, including the following…
1 – Tips must be paid in cash or via a cash-equivalent medium, such as credit or debit card payments.
2 – Employees must receive tips directly from customers or through a tip-sharing pool.
3 – Tips must be voluntary. Service fees automatically charged for larger parties at a restaurant cannot be deducted as a qualifying tip.
4 – Managers and supervisors who pool tips with employees are not eligible to deduct those amounts, but they may deduct tips they receive directly.
I realize that this may cause even more questions than it resolves, so a copy of the “guidance” may be found at the following web address.
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
Let me leave you with this…
Just because Congress passes a bill and the President signs it into law doesn’t mean much. It should, but it doesn’t.
The IRS then decides whether or not to enforce it. If they decide to enforce it, they then decide what parts they will or won’t enforce.
Welcome to the nightmare that is taxation. I’m writing about this because it may cause several problems for employers.
Since this was released four working days before the end of tax season, here’s a couple of problems that may need to be addressed.
If you included tips that are no longer includable as non-taxable on your W-2’s that were due months before this new guidance, what do you do? Should you amend?
If you do, your employees whose tips are now taxable and who already filed their returns won’t be happy. I can see them leaving your companies in droves.
If you don’t and they are audited, it’s the same thing. You’ll become Peck’s Bad Boy in a heartbeat.
The worst part is that this applies to management as well. You could lose entire teams that you’ve spent years building.
You’re damned if you do and damned if you don’t.
Whenever the IRS does something like this I smell money. A significant amount flowing to the Service in additional taxes, penalties, and interest.
Don’t tease yourself for an instant. The IRS doesn’t exist to help anyone.
They’re a collection agency with almost unlimited power to take your hard earned dollars.
Why didn’t this “guidance” come out last December when it would have been easy to apply? I’ll give you 99 guesses as long as the first 98 don’t count.
I’m now waiting on updated “guidance” to be issued for the No Tax On Overtime Rules. I’m wondering what nightmares that will cause.
As always, I’m the only thing standing between them and your bank accounts.
If you’re having difficulties with your accounting and tax work, let’s talk today…
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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