Another Question on No Tax on Tips

[Frustrated-in-IL]

I have a client filing Schedule C as a pet groomer.  The occupation itself qualifies for NTOT.  While he receives tips, he does not receive any Forms 1099 or other information statements.  I get that he won't qualify for NTOT.

However, the sole employee is his spouse.  She is paid on Form W-2.  I am getting hung up on the W-2 worksheet, Part 3, Question 10 "I own or have partial ownership in this company".  I read the proposed regulation dated 9/22/2025 and to me, it is as clear as mud.  So by now, you probably know what I am going to ask:  for this purpose, does the spouse have ownership attributed to her?

[Just-Lisa-Now-]

community property state?

[BobKamman · Accepted solution]

@Frustrated-in-IL is in Illinois; if his clients are, that's not a community property state.

I think the ownership question matters only if the payor is owned or partially owned by the payee.  What's important is who owns the pet, not who owns the business.

In my opinion, disallowing tips to self-employed people who don't receive 1099s comes under the "absurd result" rule of statutory construction that means the literal reading of Section 224(a) can be thrown out.  I'm taking the deduction for my self-employed clients who do personal-service work.  You do what you want with yours.  When Congress and/or Treasury clears this up, you can always file amended returns.  

[Frustrated-in-IL]

Lisa, the Schedule C business and the the taxpayer's residence are located in Illinois so not community property.  

[Frustrated-in-IL]

(9) No ownership in or employment by payor. A tip received by an employee or other service provider who has an ownership interest in or is employed by the payor of the tip is not a qualified tip.

Bob, I went back and re-read above again and I think your explanation is correct.  Thank You!

[Frustrated-in-IL]

My original question though still is unanswered.  How do I answer the question on the W-2 worksheet, Part 3, Question 10?

Also, given Bob's interpretation, why is the question even there?

[IRonMaN]

Looks like a "no" to me.  

@Frustrated-in-IL sounds like tips could fill in the open slot for all of the time you spent last year researching energy credits. 😀

[Frustrated-in-IL]

I unfortunately think you might be right.  Even something simple is complicated.

IMO, the best part of the OBBB was the repeal of the energy credits.  Too much time was spent determining nothing would qualify.  Anyway, my time saved there is now being spent on tips! 

[abctax55]

@BobKamman 

CAGMC attitude.  I like it.

[Frustrated-in-IL]

Okay, I'll bite.  What is CAGMC?

[abctax55]

Sorry... from many years ago..... Chuck/Archie (may he & his Miata RIP) used it.

Come And Get Me Coppers

@IRonMaN 's version of 'running with scissors'

[Terry53029]

@Frustrated-in-IL If you like Bob's answer you should mark it as best answer. I did it for you this time, and supprised it let me

[Frustrated-in-IL]

Apologies - have been away for a few days.  Thank you.  Yes, I do believe Bob's answer is correct and I wish/hope the W-2 worksheet will be clarified because even now when I look at it, I still am confused as to what they are getting at.

[ATBLLC]

I agree. I think it's a "no" too.