Kudos to Treasury for releasing—a month before deadline—its preliminary list of jobs that might be covered by the budget reconciliation act’s “no tax on tips” provision, followed by last week’s posting of 71 pages of proposed regulations.
But the list—containing 68 occupations—is a cautionary tale of the dangers of rushing to beat a deadline, especially when given vague instructions.
I recently made the case for Treasury to swiftly release guidance on the reconciliation act’s provisions—and in particular, the tip deduction that took effect this year. Here’s a caveat: Guidance can’t always fill gaps in the law, especially when those gaps are very large.
Under the act, some taxpayers can deduct cash tips—up to $25,000—from their income. The amount a person can deduct begins to phase out when their income exceeds $150,000 for unmarried filers and $300,000 for married couples filing jointly.
People qualify for the deduction if workers in their occupation customarily and regularly received tips prior to 2025. Congress left it up to the Treasury Department and the IRS to provide a list of covered occupations by October 2.
Given recent “tipflation,” I expected the list would extend far beyond the restaurant, salon, and spa workers covered by the employer credit for Social Security and Medicare taxes on tips. But I never anticipated 68 occupations and 205 illustrative examples, some helpful and others perhaps redundant (for example, bread bakers and bagel bakers). And certain inclusions—like plumbers, comedians, and podcasters— were surprising.
To derive this list, Treasury and the IRS conducted a comprehensive and impressive analysis—turning to the Oxford dictionary, legal precedents, and legislative histories to define “customarily and regularly” and then analyzing tax return and survey data to identify occupations that met that definition.
Still, there are opportunities for taxpayers who did not receive tips in the past. The regulations say taxpayers can “genuinely” reclassify their occupation to one on the list when the relabeling does not constitute a“meaningful economic change.” But the regulations stop there, and vague laws and guidance can result in disputes between taxpayers and the IRS.
Then there’s the question of service charges—those automatic charges on restaurant bills that take the place of tips at many restaurants. The proposed regs state that those aren’t tax-free. Maybe restaurants will revert to tipping in the future, though there are sometimes local laws that encourage service charges. However, there’s no relief for servers this year who have already received service charges.
Still unanswered: How many people had to receive a tip for their occupation to be included in the list?
Table A in the regulations suggests the threshold was low. As expected, most bartenders and waitstaff received more than $100 in tips in 2023 (83 percent and 75 percent, respectively), and tips constituted nearly two-thirds of wages, on average, among the recipients. In contrast, only 0.2 percent of plumbers reported tips, and just 5 percent, on average, of their earnings came from tips. The table does not detail tips earned by types of entertainers and digital content creators, but overall, just 8 percent of workers in those categories received tips. Among the recipients, tips represented over half of their earnings.
The long list opens the door to taxpayer abuse. Last year, when both major presidential candidates floated “no tax on tips” proposals, my TPC colleagues Bill Gale and Ian Berlin warned that some professionals—like lawyers and hedge fund managers—might reclassify income as tips.
The act probably shuts down that incentive for lawyers and hedge funders by carrying over a restriction from Section 199A, which provides a 20 percent deduction for qualifying business income. Certain businesses, including those related to law, financial, and brokerage services, can’t claim the deduction.
Notably, the Section 199A restriction also applies to the performing arts and athletics. What does that mean for the comedian and the podcaster? Comedians are specifically called out by the regulation: Their tips (if any) are taxable when they perform in a comedy club, even though they are a covered occupation.
In the rush to write legislative language, it’s tempting to cut and paste from other sections of the tax code. Indeed, with two exceptions, the Section 199A restriction was lifted from the section that addresses gains from small business stock. But what makes sense in one context may not in another.
Congress may need to provide more guidance. However, technical corrections bills face a high bar, even in less contentious times.
Ultimately, even detailed guidance cannot fix vague or poorly drafted legislation.
