A new federal deduction lets tipped workers write off as much as $25,000 in tip income starting with the 2025 tax year, part of a package of individual tax breaks Congress passed last year. The deduction phases out above $150,000 of modified adjusted gross income for single filers and $300,000 for joint filers, according to the IRS. But the same law shuts an entire slice of tipped employees out of the benefit entirely, based solely on the kind of business that signs their paycheck. A server, stylist or valet who happens to work inside a law office, a doctor’s practice or an accounting firm loses the deduction regardless of income, hours worked or how routinely tips are the norm in that job.
The Specified Service Trade or Business Carve-Out
The One, Big, Beautiful Bill Act created the tips deduction under a new section of the tax code, Internal Revenue Code Section 224, covering tax years 2025 through 2028 for both employees and independent contractors. The IRS’s own summary of the law confirms the $25,000 cap and the income-based phase-out, available to itemizers and non-itemizers alike.
The statute also wrote in an exclusion aimed at professional-service businesses. Tips do not qualify for the deduction if they are earned in the course of a specified service trade or business, or SSTB, a category defined years earlier under Section 199A of the tax code for a different deduction. That list names health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing, investment management, and trading or dealing in securities, partnership interests or commodities, plus any business whose main asset is the reputation or skill of its own employees or owners, according to a summary of the proposed regulations published by the AICPA’s Tax Adviser. A law firm, a medical or dental practice and an accounting business each fall squarely inside that list.
The reporting mechanics tie tipped income to the exclusion as well. Cash tips and a worker’s occupation are meant to show up on the same statements employers already file — W-2s, 1099s or Form 4137 — with the IRS choosing not to require those forms to change for 2025 wages but adding a dedicated reporting code starting with 2026 pay. None of that paperwork asks an employer to certify its own SSTB status; the burden of knowing falls on the worker filing the return.
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Why the Test Follows the Employer, Not the Job
The exclusion is not about what a worker does for a living. Treasury’s proposed regulations, carried through into the final rule, make clear that the relevant business for this determination is the employer’s business, not the employee’s own duties and not whether that employee’s occupation sits on the government’s separate list of jobs that customarily receive tips. A worker’s tips stop qualifying the moment the employer itself operates as an SSTB, no matter what task earned the tip.
That framing produces some counterintuitive results. An esthetician or massage therapist tipped for treatments delivered inside a dermatology or physical-therapy practice would lose the deduction, even though massage and personal-care work otherwise qualifies. A front-desk attendant tipped for holiday gifts at a law firm’s offices, or a barista tipped at an in-house café run by an accounting firm, would face the same result. The job itself might be exactly the kind of work the deduction was built to help; the employer’s line of business is what disqualifies it.
Congress did not write a new definition for this carve-out. It borrowed the specified-service-trade-or-business category wholesale from Section 199A, the pass-through deduction Congress created in its 2017 tax overhaul to limit which business owners could claim that separate break. The exclusion also only touches this one deduction: a law firm, medical practice or accounting business keeps every other tax benefit tied to its own income, and its non-tipped staff are unaffected because the tips deduction was never available to them in the first place.
The Occupations Treasury Says Do Qualify
Outside SSTB employers, the deduction covers a specific, government-published list. Treasury and the IRS issued final regulations on April 10, 2026 naming more than 70 occupations across eight categories: beverage and food service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery. Bartenders, wait staff, hotel housekeepers, electricians, hair stylists, tour guides and rideshare drivers are among the jobs named on that list, and the same regulations cap a self-employed worker’s deduction at that person’s own net business income.
The rule took public input before it was finalized: Treasury and the IRS said they received more than 300 comments and held a public hearing in October 2025 before publishing the final occupation list. IRS Chief Executive Officer Frank Bisignano said in the agency’s announcement that workers are already receiving refunds tied to the deduction, a sign the program is running even as its business-type exclusion keeps drawing a hard line between which tipped employees can claim it and which cannot.
When a Disallowed Tips Claim Delays a Refund
A worker who claims the tips deduction while employed by a specified service trade or business risks having the IRS adjust the return and hold the refund for review. That kind of adjustment can trigger the same slow-moving correspondence process as any other return flagged for a second look, complete with notice codes that read like a foreign language to most filers. Sorting out what a notice means and confirming where a refund actually stands afterward call for separate steps most taxpayers have never had reason to learn.
The IRS Refund Recovery Kit pairs a notice decoder with the refund-trace steps under Form 3911 and a refund status tracker spreadsheet for logging each follow-up call.
Open the refund status tracker spreadsheet in The IRS Refund Recovery Kit.
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