Hamill: A curious cast of jobs in the new tip exclusion

By now, you have probably heard that the new tax law creates an income exclusion for tips. This begins in 2025.

The law, as now seems the norm, was hastily constructed. The maximum excluded income is $25,000 each year. The exclusion is lost if income exceeds a threshold, which is $150,000 for single filers and $300,000 for married.

As this exclusion progressed through the legislative process, some people warned that workers would try to reclassify earnings as tips. The legislation made several swipes at such strategies.

First, no tip exclusion could apply to a “specified service” business. This includes many professionals, such as accountants, lawyers, doctors and so on. The tip exclusion was intended to apply to those who customarily received tips.

The second swipe was to try to define those who customarily received tips. To qualify, the “custom” had to be established by Dec. 31, 2024.

Because no one wants to tip a member of Congress, those people were probably not familiar with the custom of receiving tips. So, it was left to the Treasury Department to define occupations that had customarily received tips as of the Dec. 31, 2024, cutoff date.

Treasury had 90 days from the July 4 enactment date to publish its list. The list, or at least its first draft, was released on Sept. 2. It is lengthy. It creates eight categories of “Treasury Tipped Occupation Code” (TTOC) occupations. They are numbered and total 68.

To reduce, but not eliminate, confusion, each TTOC is linked to a “Related Standard Occupational Classification (SOC) System Code.” A footnote explains that there is not a direct match between the TTOC and the related SOC.

Taxpayers will want to qualify for the exclusion. They will push tax preparers to agree that they are tipped. Tip income remains subject to Social Security and Medicare taxes.

Dishwashers, including “silverware cleaners,” qualify. Clowns, provided they come out of the sewer, qualify.

Nine categories of home service workers qualify. This includes a handyman and a weed sprayer.

A safe installer and a chimney sweep qualify. So too does a “car fuel deliverer” and a “car battery technician.”

Personal service providers qualify. This includes butlers and “elderly companions,” presumably a companion for the elderly rather than an elderly person who is a companion.

Personal appearance and wellness contain 11 categories. This includes an ear piercer and a nose piercer. Bellybutton piercers should also qualify, as the category is said to include creating “openings in the human body for the insertion of jewelry.”

In an Albuquerque twist, “hot air balloon aeronaut” qualifies. A knitting instructor will also qualify as well as a boat waxer.

Treasury officials seek comments on the preliminary list, but they say that the final list is expected to be substantially the same. The preliminary list was released to satisfy the 90-day requirement in the legislation. The list will be more formally introduced as a proposed regulation.

Proposed regulations have a comment period as they must satisfy the Administrative Procedures Act. The comments will follow the proposed regulations, and the preamble for any final regulations will contain all comments and the Treasury’s response.

It is not clear how tax reporting of tips will satisfy the requirements for payroll taxes. The exclusion dates to six months before the legislation was passed. Tax return preparers will have some interesting conversations with clients when the 2025 tax filing season gets underway.

The occupations I have listed are simply illustrative examples in the IRS guidance. The TTOC occupation description for each example is much broader.

The old saying, “If you have a hammer, everything looks like a nail,” might apply here. If you have an exclusion, everything will look like it fits — at least to clients. Many tax practitioners will find clients hammering away at them to accept an occupation as a tip-eligible one.

I have not (yet) heard how Treasury compiled a list of occupations that are “customarily” tipped. This process may be revealed in the preamble to the proposed regulations. The process followed would be helpful to those who seek to be added to the list.

I doubt the comments on Treasury’s work will subtract from the list. It will be interesting to see how long this list eventually becomes.