The IRS has now issued Rev. Rul. 2025-18278, giving final clarity on how the new federal deduction for qualified tips (enacted under the “One Big Beautiful Bill Act”) will work starting in 2025. While the deduction is designed to boost take-home pay for tipped workers, employers need to understand their reporting responsibilities — and where their role ends.
What Counts as a Qualified Tip
The ruling defines “qualified tips” as:
- Voluntary cash tips paid by customers (including cash, card, or electronic payments like Venmo/PayPal).
- Given in the course of employment in an occupation Treasury has designated as “customarily tipped” before Dec. 31, 2024 (think restaurant servers, bartenders, drivers).
- Not mandatory service charges, auto-gratuities, or negotiated fees.
What Doesn’t Count
- Performers and entertainment workers (dancers, musicians, streamers, etc.) — excluded under the Specified Service Trade or Business (SSTB) rules.
- Healthcare, athletics, and similar professions — also SSTBs, excluded.
- Non-cash “gifts” like tickets, services, or tokens that aren’t exchangeable for cash.
So yes, a tip for a server at your restaurant may qualify, but an online fan “tip” for a live-streamer or performer does not. And while teachers are incredibly valuable, an apple on the first day of school has never counted as a tax-deductible tip. Our feeling is that educational streamers are also out.
What Employers Should Focus On
1. Don’t Advise Employees on Their Taxes
Your job is to track and report; employees will determine whether they qualify for the deduction with their own tax advisors.
2. Reporting is Coming
- Starting with 2026 Forms W-2 and 1099 (filed in early 2027), employers must report qualified tip amounts in Box 12 and the related occupation code in Box 14.
- Some employers may voluntarily start in 2025, but it’s not required.
3. Train Staff on Classification
Make sure managers and payroll teams understand that service charges ≠ tips. Misclassifying can create compliance problems.
4. Work with Payroll & POS Vendors
Ask now whether your payroll provider or POS system will be ready to capture and code tips under the new IRS requirements.
The Bottom Line
This new deduction is about supporting tipped workers in industries where gratuities are a normal part of income. For employers, the key responsibility is system readiness and proper reporting, not interpreting who gets the deduction.
Focus on compliance, let employees handle their own tax filings, and you’ll keep your business out of trouble as these new rules take effect.
