Tax insight

Proposed regulations outline employer considerations for tips

Insight
5 minute read
September 26, 2025

What happened?

Treasury on September 22 released proposed regulations that address the temporary federal income tax deduction created by the “One Big Beautiful Bill Act” (Act) for individuals who receive certain qualified tip income, effective for calendar years 2025 through 2028. The guidance provides a proposed definition of "qualified tips" for employers with tipped employees. The proposed regulations also enumerate the occupations that customarily and regularly received tips on or before December 31, 2024 for these purposes. The regulations are proposed to apply for tax years beginning after December 31, 2024. Taxpayers can rely on the proposed rules for those tax years until the date the regulations are published as final, provided that the proposed regulations are followed in their entirety and in a consistent manner.

Why is it relevant?

The Act includes significant modifications to the tax treatment of tips. The proposed regulations will help employers identify qualified tips paid to employees in occupations that customarily and regularly receive tips. This guidance provides needed information to employers to be able to manage 2025 and beyond reporting considerations and new forthcoming federal income tax withholding tables.

Action to consider

Employers will need to consider how their point-of-sale system and tracking mechanisms differentiate among the types of tips received and reported by employees, such as auto-gratuities versus voluntary tips and tip pooling. Employers also will need to differentiate among employees based on job classification. Given the time needed to implement reporting solutions, employers should address administrative challenges efficiently by putting processes in place now to capture what must be reported to employees pending additional Treasury and IRS guidance.