Who Qualifies for the New Tip Income Exclusion and Why SSTB Employees Are Excluded
Overview
The One Big Beautiful Bill Act introduced a new federal exclusion for certain tip income beginning in 2025. While this provision has been widely marketed as a benefit to tipped workers, the rule is far narrower than many taxpayers expect. Employees and independent workers associated with Specified Service Trades or Businesses, commonly referred to as SSTBs, are categorically excluded from the benefit.
This restriction mirrors long standing rules under the Qualified Business Income Deduction and uses the same statutory definition of an SSTB. As a result, eligibility depends on the nature of the employer or business, not on whether tipping is customary in the role.
California taxpayers should also be aware that state conformity issues may further complicate planning. A detailed discussion of California treatment is available in my prior article, California Nonconformity With Overtime and Tip Deductions .
Schedule a Consultation if you want a quick eligibility review for your industry or entity structure.
What Is a Specified Service Trade or Business
An SSTB is defined under Internal Revenue Code Section 199A and Treasury Regulation Section 1.199A-5. The definition applies uniformly for both the QBID phaseouts and the new tip income exclusion.
A business is an SSTB if it involves the performance of services in any of the following fields:
- Health, including physicians, dentists, nurses, chiropractors, psychologists, pharmacists, and similar professionals, limited to direct patient care
- Law, including attorneys, law firms, legal consultants, and integrated paralegal services
- Accounting, including CPAs, enrolled agents, bookkeepers performing accounting services, and tax preparation
- Actuarial science
- Performing arts, including actors, musicians, singers, dancers, and entertainers
- Consulting, broadly defined as providing professional advice or counsel
- Athletics, including athletes, coaches, and trainers providing athletic services
- Financial services, including investment advisors, wealth managers, and financial planners
- Brokerage services, excluding real estate brokers by statute
- Investing and investment management
- Trading in securities, commodities, or partnership interests
- Dealing in securities, partnership interests, or commodities
- Reputation or skill of one or more employees or owners, limited to endorsement income, licensing of name image or likeness, or appearance fees
Why SSTB Status Disqualifies Tip Income
Under the OBBBA, tips received by employees or self employed individuals are not eligible for the exclusion if the employer or business is classified as an SSTB. This applies regardless of job title, customary tipping practices, or whether the worker personally provides professional services.
The controlling question is simple:
Is the employer or business an SSTB?
If the answer is yes, the tip exclusion is unavailable. This approach intentionally tracks Section 199A and is applied strictly.
Common Edge Cases Explained
The chart below applies the SSTB definition to the most commonly misclassified real world scenarios. Employer or business classification controls.
| Category | Scenario | SSTB | Tip Exclusion | Reasoning |
|---|---|---|---|---|
| Restaurants and hospitality | Standalone restaurant | No | Allowed | Food service is not a listed SSTB |
| Restaurants and hospitality | Bar or nightclub | No | Allowed | Entertainment venue does not convert hospitality into performing arts SSTB |
| Restaurants and hospitality | Casino food and beverage staff | No | Allowed | Hospitality, not a listed SSTB |
| Restaurants and hospitality | Restaurant owned by a law firm and integrated into the firm | Yes | Not allowed | Employer is an SSTB |
| Restaurants and hospitality | Restaurant operated as a separate legal entity | No, if truly separate | Allowed, if truly separate | Must have separate books, employees, branding, and no income shifting |
| Salons and spas | Hair salon or barber shop | No | Allowed | Personal services are not health SSTB |
| Salons and spas | Nail salon | No | Allowed | Cosmetic only services are not health SSTB |
| Salons and spas | Massage spa for relaxation only | No | Allowed | No medical diagnosis or treatment |
| Salons and spas | Medical spa with Botox, fillers, or laser procedures | Yes | Not allowed | Health SSTB |
| Salons and spas | Estheticians inside a dermatology practice | Yes | Not allowed | Integrated health services |
| Gyms and sports | Gym or fitness studio | No | Allowed | Athletics SSTB is narrower than general fitness |
| Gyms and sports | Personal trainer for general fitness | No | Allowed | Not an athletics SSTB in typical fitness contexts |
| Gyms and sports | Yoga or Pilates studio | No | Allowed | Instruction based wellness is not athletics SSTB |
| Gyms and sports | Professional sports team | Yes | Not allowed | Athletics SSTB |
| Gyms and sports | Coaches and trainers for a professional team | Yes | Not allowed | Direct athletic services |
| Gyms and sports | Referees or umpires | No | Allowed | Generally excluded under regulations |
| Gyms and sports | Sports broadcaster or commentator | No | Allowed | Media services, not athletics SSTB |
| Casinos and entertainment | Casino dealers | No | Allowed | Gambling services are not a listed SSTB category |
| Casinos and entertainment | Casino hospitality staff | No | Allowed | Food and beverage service |
| Casinos and entertainment | Performers in shows or concerts | Yes | Not allowed | Performing arts SSTB |
| Casinos and entertainment | Stagehands, lighting technicians, or production crews | No | Allowed | Not performers |
| Casinos and entertainment | DJs in clubs | Facts and circumstances | Facts and circumstances | If the DJ is the attraction and paid for performance, SSTB risk increases |
| Financial and professional offices | Law firm | Yes | Not allowed | Law SSTB |
| Financial and professional offices | CPA firm | Yes | Not allowed | Accounting SSTB |
| Financial and professional offices | Wealth management firm | Yes | Not allowed | Financial services SSTB |
| Financial and professional offices | Bank teller | No | Allowed | Banking is excluded from financial services SSTB |
| Financial and professional offices | Loan officer | No | Allowed | Lending is excluded |
| Financial and professional offices | Insurance agent | No | Allowed | Generally outside SSTB definition as applied here |
| Financial and professional offices | Concierge staff in a law firm | Yes | Not allowed | Employer is SSTB even if the role is nonprofessional |
| Consulting and adjacent services | Management consulting firm | Yes | Not allowed | Advice driven professional consulting |
| Consulting and adjacent services | IT support company focused on implementation | No | Allowed | Implementation services are not consulting when not primarily advice |
| Consulting and adjacent services | Marketing agency focused on execution | No, if execution focused | Allowed, if execution focused | Contract language matters, advice centric work increases SSTB risk |
| Consulting and adjacent services | Strategy advisory firm | Yes | Not allowed | Professional advice or counsel |
| Consulting and adjacent services | HR outsourcing | No | Allowed | Operational services rather than advice as the core product |
| Mixed use and multi entity structures | SSTB and non SSTB services within one entity | Yes | Not allowed | Entire entity treated as SSTB when SSTB is a principal activity |
| Mixed use and multi entity structures | Separate legal entities with shared owners | Depends | Depends | Possible separation only with real operational independence |
| Mixed use and multi entity structures | Income shifting between related entities | Anti abuse risk | At risk | Anti abuse rules apply to prevent paper separation |
| Mixed use and multi entity structures | Shared employees across entities | High SSTB taint risk | At risk | Shared labor strongly supports integration |
|
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